The Truth About Annuities

The truth about annuities is a complicated one, but we’re here to help you understand when to use them and when not to use them. From a February 2015 article in Financial Planning Magazine:

Eight-four percent of adults polled in a new TIAA-CREF survey want a guaranteed income stream in retirement and 46 percent are concerned they will run out of money. However, only 14 percent have purchased an annuity to secure a steady stream of lifetime income.

I hope it never reaches 15%. Here’s the actual truth behind annuities.

OK, so in some cases, no one knows how many, it is a valuable tool for people who are concerned about having a stream of income to count on.

Unfortunately, most people who buy annuities do so under false pretenses. In the last week, I have heard of three people all in their 70s and 80s who were “sold” annuities as an alternative to low CD rates. Guaranteed fixed rate of return and available for your withdrawal when you need it. Except you will pay ridiculous surrender charges if you want to cash it in, and, exorbitant internal fees for the privilege of claiming you are getting 5% plus on your money.

If the true intention of the purchase is to “annuitize” the contract, that is, to begin taking a monthly fixed payment from the investment, then it serves a valuable purpose to give people the security of knowing they will always get this same amount for as long as they live. But, depending on what payment option you chose, if you die before you exhaust your investment value, the remainder of the money can be fully taxable to your beneficiaries and unless it was set up properly, your spouse may not get the benefit for his or her lifetime.

These contracts are so loaded with terms and conditions which benefit the insurance companies that underwrite them, it becomes a joke to believe you will ever get the better end of the deal.

Imagine a fixed payment of $500 per month for the rest of your life. If you are in your 60s when you get the first check, and your life expectancy is 83 or more, inflation and taxes will eat away at that monthly figure within the first 5 years. It will buy less and less. But once you “annuitize” the contract, it is fixed. You can’t get any more than $500 per month. You’re stuck.

That’s the truth about annuities. Now, you need to ask yourself something: how much are you willing to give up to have the “security” of knowing you will get a fixed paycheck every month for as long as you live?

Photo Credit: Heiko Gärtner via Flickr cc