Investors have a love-hate relationship with annuities.
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On the one side, you have people who are drawn to the idea of safety and guarantees. Maybe they know someone who's had a good experience with an annuity, and they want the same thing for their retirement.
On the other side are the people who believe annuities are a mistake. They think investing is all about the stock market and that taking a risk is necessary to get a better return. Or they want their money to always be liquid, and the idea of a contract is a turnoff.
I believe strongly in letting the purpose of your money dictate its position. Instead of listening to what others have to say about an investment -- whether it's friends, family, colleagues or the media -- I advise my clients to determine their own goals and proceed from there. And that advice certainly applies to purchasing an annuity.
Annuities can be complicated, which is a big part of the problem. There are a few different kinds, and some may not fit your needs. Plus, the contracts can be complex. In addition, they do come with such potential costs as fees and surrender charges.
But I've found, working with my clients, that there are two basic reasons why somebody would want an annuity -- and those reasons are pretty simple.
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1. Annuities offer guaranteed income
I often meet with people who have no guaranteed income for retirement other than their Social Security benefits. They might have other savings, but it's in the stock market or other investments with some risk.
So, let's say a couple comes in with living expenses of $4,000 a month, and their Social Security checks will cover only $2,000 of that. Neither spouse has a pension, and they need and want another income stream guaranteed to pay out the remaining $2,000 every month.
That's where an annuity comes in. By positioning a portion of their savings into an annuity, they can potentially generate the extra $2,000 a month and bridge that income gap. Once that need is covered, they may be able to take some risk with the rest of the money in their portfolio -- or they can use it any way they please through the years, for whatever need comes up.
If the same couple came in with plenty of fixed income -- Social Security and a pension ... and a desire to keep the rest in the market -- we wouldn't necessarily recommend an annuity, because they wouldn't need it. But in this case, it serves a purpose, and they don't have to worry that the ups and downs of the market will upend their lifestyle in retirement.
2. Annuities offer protection
Sometimes we have clients who have the guaranteed income they need, but they still don't want their money in the stock market. They prefer to focus on preservation over accumulation, and they don't want to take a risk with any part of their nest egg. They just want to put the money in a safe place where it can grow at a reasonable rate.
We often find a fixed indexed annuity is right under these circumstances. It's designed to grow safely, and may earn anywhere from 3% to 6%. The purpose behind the purchase is a little different. It's designed to help keep your money protected. But again, an annuity is a viable retirement planning vehicle.
Annuities can offer the protection and income many people need. You can't lose your principal, and you'll have guaranteed income coming from it. What's not to like about that?
See Also: 4 Questions to Ask Before Adding an Annuity to Your Retirement Plan
Kim Franke-Folstad contributed to this article.
Annuities are insurance contracts designed for retirement or other long-term needs. They provide guarantees of principal and credited interest, subject to surrender charges. Annuity guarantees and protections are backed by the financial strength and claims paying ability of the issuing insurer. The article is for general information only and is not intended to provide advice or recommendations for any individual. We suggest that you consult your accountant, tax, or legal adviser with regard to your individual situation.
Cornerstone Wealth Management offers securities through Kalos Capital, Inc. and investment advisory services through Kalos Management, Inc., both at 11525 Park Woods Circle, Alpharetta, Georgia 30005, (678) 356-1100. Cornerstone Wealth Management is not an affiliate or subsidiary of Kalos Capita, Inc. or Kalos Management Inc.
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The views and opinions expressed herein are the views and opinions of the author and do not necessarily reflect those of Nasdaq, Inc.
