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Does an Annuity Belong in Your Retirement Portfolio?

Does an Annuity Belong in Your Retirement Portfolio?

Annuities are suddenly the topic of conversation.

For one thing, many investors are weary from the up-down-up-down stock market and are fleeing to "safety". Then there's the push from the Obama administration. One proposal would encourage employers and IRA providers to offer deferred annuities in 401(k)s, other workplace plans and IRAs. Another proposal is meant to urge employers to encourage employees who have traditional defined benefit pension plans to annuitize.

The goal is clear: minimize the risk of people outliving their money by providing a guaranteed monthly income. That's the attraction of annuities -- knowing what you're going to get, when. But annuities are not nearly so simple.

Here's what you need to know to sort out some of the mysteries surrounding annuities.

What is an annuity?

First and foremost, it's essential to understand what an annuity is. It's an insurance contract. An annuity offers some form of a guarantee. There are different types of annuities -- immediate, variable, fixed, and indexed. While a whole book could be written just trying to explain the features of each, in a nutshell, an immediate annuity is when you give the insurance company a lump sum of money. They then pay you a set amount of income, explains Mike Krise with the Krise Wealth Management Group of Raymond James. This payment could be guaranteed for your lifetime, or a set period of time. With a variable annuity, you deposit money into the contract, the money is invested and your final yield varies according to how well these investments perform. All growth is tax deferred.

On the other hand, with a fixed annuity, you deposit money into a contract and you receive a stated amount of interest -- kind of like buying a CD or a corporate or treasury bond. There is no chance of loss with this annuity, unless the insurance company fails or becomes insolvent, says Krise. A fixed index annuity has a guaranteed interest rate, but has higher earning potential. You can tie your money to the upside of a market index such as the S&P 500. This offers potential for higher return, without any market risk. If the index goes down in value, you do not not take any loss, though the upside has a cap, says John McNamara of McNamara Capital Investment Group.

The appeal of annuities

The major plus of annuities are the guarantees associated with them. When you buy an annuity, you are typically buying them for the guarantees they offer. Guarantees come in a couple of flavors -- sometimes in the form of lifetime income, or the guarantee of your principal (your money) coming back to you, there can also be a death benefit guarantee. They offer tax deferred growth.

Annuities in various forms can be used to complement other retirement income and social security. A "bucket strategy", utilizing fixed, variable and single premium immediate annuities whereby a retiree draws from each, can create a steady retirement income stream, says Jeffrey Duncan, a MassMutual agent with Lee, Nolan & Koroghlian.

Then too, Krise has seen clients who may not have been able to get life insurance, buy an annuity with a death benefit rider, so they can leave money to heirs. There is typically no medical underwriting.

Avoid gotchas

But, annuities are not a retirement panacea. For sure, you want to have a sit down with your financial advisor before you purchase one. There are several reasons to proceed with caution.

Fixed annuities are based on interest rates. With interest rates as low as they are, payouts aren't worth tying up your money, says Matthew Tuttle, CEO of Tuttle Wealth Management. Indexed annuities are based on interest rates and volatility. He says that with interest rates low and volatility high, they don't offer much return potential. And while variable annuities appear tempting with their guarantees, he says they are often very confusing and not worth the extra expenses you have to pay to get them.

Fees can be tricky. For example, typically a variable annuity's fee can range from 2.5-4%, says McNamara. Furthermore, those fees are often not listed on quarterly or monthly statements. McNamara says he had a 60 year-old widow come in with several variable annuities totaling about $400,000. When they contacted the company they found out that the fees were 3.6% annually, about $14,400 in fees. The fees, he says, come out of the account each year, whether the account is going up or down.

Know too that although annuities are offered through insurance companies, they are taxed very differently than a pure life insurance policy. Any gains in an annuity contract are subject to tax, and, if you take out proceeds from an annuity contract before age 59 1/2, you could be subject to taxes and penalties, says Krise.

Annuities are not particularly liquid. A typical annuity contract has a surrender period of seven years. That means during the first seven years, you could be charged 7% or higher to take money out (this is before taxes and penalties), explains Krise. Read the fine print and make sure all your questions are answered before entering into a contract.

Krise says while most investors could most likely find a niche for annuities as part of their overall investing picture, it's not the place for all your money. In fact, he leans harder, "If you have no need for the guarantees that an annuity contract offers, don't buy."

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Guest123   |     |   Comment #1


Dear Ms Mance-Nash,

You are at it again!  Taking quotes from others and promoting a product that is of questionable nature (at least so far as the readership of this blog is concerned).

Allow me to ask you questions:  Can you, and will you ever try to write an article without taking quotes from other individuals whose opinions are potentially biased?

I have written elsewhere the major dis-advnatages of the Annuities (Immediate and many Fixed) types, that you have not stated in crystal clear terms, which are worth repeating:

1) Annuities are not insured by either NCUA or FDIC.

2) Annuities are not guaranteed by the US Treasury, unlike the I-Bonds, EE-Bonds.

3) Essentially when you buy an Annuity (Immediate and many Fixed) what you are buying is merely a promise, that the entity selling you the Annuity will keep paying you for a certain duration or as long as you stay alive!  (Does this promise sound too good to be true?)

4) Most of the times the Annuities are sold by insurance companies.  Insurance companies like AIG, which was bailed out by the US Tax-Payers!  So the guarantees (Anuuity) that you bought will become null and void if the insurance company goes bankrupt!

5) The people who buy Annuity are termed as "policy holders" by the Insurance companies.  The Insurance companies have obligation to maximize profits for their "Share holders", definitely not for their "policy holders".

6) When you buy an Annuity (Immediate and many Fixed), the ownership of your money is transferred from you to the Insurance company.  There is a stark contrast between buying of a certificate/CD and buying of an Annuity!  When  you buy a certificate/CD, you retain the owneship of the money.  But when you buy an Annuity (Immediate and many Fixed) you lose the ownership of the money.  The Insurance compnay becomes the owner of the money.  In return all you get is a promise (guarantee) that the Insurance company will pay you.

7) When the Insurance company becomes the owner of your money after you buy annuity, it implies that this money can and will be used by the Insurance compnay to settle any claims/fines (say by IRS, Courts, Employees, Policy Holders, Share Holders) they need to pay.

Bottom Line:  Ms Nance-Nash in her typical style has presented a product of questionable nature largely based on (mostly) baised opinion of others; and I have presented some facts that are crying out for caution, crying out "Caveat Emptor".

Yours Truly,

Anonymous   |     |   Comment #2
I looked into this--and will NEVER go this route----you give them YOUR money and than  pay them some sort of annual fee and management fee---so they can dole out your own maoney back to you??! Basically they take your money, invest it for themselves, make money off your mney, and pay you some small int. amount each year on your own money, while holding onto your principle! When you dye--they do this little trick--they deduct all the money they paid you in so called "interest" --nd take it out of the money they pay back to  your estate---!! 
Anonymous   |     |   Comment #3
Understatement of the year: "Annuities are not particularly liquid."
Anonymous   |     |   Comment #4
Most annuitiies are sold by insurance companies with an A rating.  Would you put all your bond portfolio in one A rated bond??????????
Anonymous   |     |   Comment #5
I'm not really a big fan of annuities, but a few facts need set straight.

No they are not FDIC insured, but in most states they are convered up to a certain amount by a guarantee fund.

However by law insurance agents and companies are not allowed to advertise the backing from the guarantee funds.

You would have to look into the specific state laws to see what applies.
NObama   |     |   Comment #6
The bigger question is does an annuity belong on this website!

Lets talk bank account deals...not this off topic stuff, PLEASE!!!
YesBama   |     |   Comment #8
#6: And an equally relevant question is whether a political statement belongs in our screen name.

Agreed... Lets talk bank account deals...not this off topic stuff, PLEASE!!!
Anonymous   |     |   Comment #7
I have to laugh about the Annuities info.  There is no place to run or hide from them.  Every bank I do business with wants to tell me about them and now we have Ms. Nash explaining them to us.  Her post doesn't bother me but I sure would prefere to hear about where we can get better CD rates!  I guess Ken knows it's dismal out there for us so he, too, is giving us guidance on "Annuities".  Times really must be bad!
Guest123   |     |   Comment #9



Dear Ms Nance-Nash,

I must wonder if you ever read the comments made by the folks here, and care to answer.

I have given 6 negative "Caveat Emptor" points above about the Immediate and Fixed Annuity.  But I do have a question to you about Variable Annuity:

Do you know of any insurance company that offers sub-accounts from Pro Funds and/or Rydex Funds and/or DireXion Funds and allow the policy holders to trade among the sub-accounts without any restrictions whatsover?  I will be grateful if you'll let me know of any such Insurance Companies, other than Jefferson National (my favorite) and Ameritas. 

I realize that on this blog trading perhaps is repugnant, but since Ms Nance-Nash you've brought up the topic of Annuity anyways, I am taking freedom of devling a bit deeper in a certain type of Annuity.

BTW, there is a stark difference between Immediate  / (many) Fixed Ammuities and the Variable Annuity.  As I indicated above, the ownership of the money put into Immediate / (many) Fixed Ammuities is transfeered to the Insurance Compnay, However for the Variable Annuity, the policy holder continues to retains the ownership of the assets out into the Variable Annuity.  If the insurance compnay were to go bankrupt, then the monies in the Variable Annuity must be returned to the Policy Holder!  ( Therefore, Variable Annuity forms an important part of my money making tactic. )

Yours Truly,

Shorebreak   |     |   Comment #10
Annuities and reverse mortgages. Cans of worms opened for discussion on many financial blogs. Both are huge money makers for the commisioned sales people involved. Of course, sometimes desperate times call for desperate measures for some people to survive.
Guest123   |     |   Comment #11


Dear Ms Nance-Nash,


Perhaps you already know about the following guidence from FASB, but allow me to present it to make clear the ownership aspect Variable Annuity.


1) The variable annuity contract is established, approved, and regulated under special rules applicable to variable annuities (such as state insurance laws, securities laws, and tax laws).

2) The assets underlying the contract are insulated from the general account liabilities of the insurance company (the policyholder is not subject to insurer default risk to the extent of the assets held in the separate account).

3) The policyholder's premium is invested in contract-approved separate accounts at the policyholder's direction.

4) The insurer must invest in the assets on which the account values are based.

5) The policyholder may redirect its investment among the contract-approved investment options.

6) The account values are based entirely on the performance of those directed investments.

7) All investment returns are passed through to the policyholder (including dividends, interest, and gains/losses).

8) The policyholder may redeem its interests at any time; however, it may be subject to surrender charges.

9) The policyholder has voting rights in certain separate account structures.


Yours Truly,

Anonymous   |     |   Comment #12
Customer money was supposedly in separate accounts at MF Global, too.

"MF Global commodity customers whose cash vanished when the firm collapsed last year are owed $1.6 billion — up significantly from previous estimates — the trustee tasked with recovering the money said on Friday. The revised figure reflects growing concerns that the trustee will not be able to claw back $700 million in customer money trapped overseas. "

Guest123   |     |   Comment #13


Dear Anonymous - #5,


You are absolutely right!  There (perhaps) is a certain safety net provided by a guarantee fund for non-Variable Annuity contracts.  Such a fund very much depends upon the state in which the policy is issued. 

Does the guarantee fund have the strength of FDIC (which sustained the bankruptcy of the likes of WAMU and Wachovia without breaking a sweat) ?  I doubt it.

Does the guarantee fund every remotely close to the guarantee offered by the US Treasury, which can figuratively and literally  come
Guest123   |     |   Comment #14
Dear Anonymous - #5,


You are absolutely right!  There (perhaps) is a certain safety net provided by a guarantee fund for non-Variable Annuity contracts.  Such a fund very much depends upon the state in which the policy is issued. 

Does the guarantee fund have the strength of FDIC (which sustained the bankruptcy of the likes of WAMU and Wachovia without breaking a sweat) ?  I doubt it.

Does the guarantee fund every remotely close to the guarantee offered by the US Treasury, which can figuratively and literally print money to fulfil any obligations.  Again - I doubt it.


Yours Truly,

Yobama   |     |   Comment #15
Some people just like to hear themselves type.
John   |     |   Comment #18
Sheryl is covering a topic that all deposit holders may be exposed to. She asks the question of does it belong in your portfolio? Most of the subject matter says it very well may not so be careful. No, she does not cover every single aspect of annuities, but that does not matter. It's still a topic that is important for every deposit holder to learn about. Alot of agents sell them as important for asset protection, which I don't see mentioned anywhere above.

I wish all negative comments were only going to Ken and only constructive criticism remained. There are some very arrogant and nasty people posting to this website.
Anonymous   |     |   Comment #19
I think we need to remember that WE are guests on Ken's site and do not control what HE wants to put on it.  If he thinks Ms. Nash's posts are appropo for his forum, that is his decision not ours.  Why don't you quit gripeing about what she posts and just don't read them if they are not what you are concerned with.  I glance over her posts and go on to other posts from our members because although I feel they aren't pertinent to what I am concerned with, I remember this is NOT my forum! 
Anonymous   |     |   Comment #20
Is this a communist site? Why do you censor and delete relevant comments? Monitoring CD rates is a waste of time for now. It's like watching paint dry.

Anonymous   |     |   Comment #21
I think it is a good idea to expand the site to include other "conservative" options--even if they are not CD's--include the pros and cons of treasury bills and notes--the 2/5/20 and 30 yr options---when to buy and when not to buy----and the fact that if you buy 10 yr notes or any of them you can always sell on the secondary market, muni bonds and other conservative investments --so people have other options than just CD's---which will probaly not do much til 2017---the truth be known---
Anonymous   |     |   Comment #22
For me personally, I prefer that this site stick solely with CD's, the original intended purpose. If I want to know about other types of investments, I'll visit other specialized sites. A general comment about other investments from time to time might be in order here also, so long as the primary purpose of this site is not compromised.  We could also hope for fewer of the tattletale types who obviously are quick to scream about others with whom they may disagree. My .02
Greg   |     |   Comment #23
I agree with tose who say some of the harsher commenters should lighten up a bit.  It's Ken's site, and he often has useful articles about alternative fixed or variable income investments (like I Bonds, E Bonds, etc.).  I, for one, am glad that we get the benefit of Ken's insights and guest commentators in more than just the narrow range of CD rates.  

Ms. Nance-Nash's article strruck me as a perfectly acceptable Annuities 101 article.  It's not the advanced course, but it doesn't pretend to be.
Ryan   |     |   Comment #24
I am happy that this site is including non-bank alternatives (especially in this rate environment).

Those who don't want an annuity can simply not read the articles or associated annuity info.

I just locked in a guaranteed 7 year 3% fixed rate on a Woodmen of the World Annuity (absolutely zero expenses as long as all monies are kept in the fixed subaccount which is gtd. to never drop below 3%).

I researched about 10 million annuities before finding this one that really met my personal needs and is functioning for me in the same way a CD or deferred annuity would only at a higher rate.  In my case, I like deferring the taxes for the 7 years and can continue even longer if we wind up in a super long term deflationary cycle that continues beyond 7 yrs.

Anyway, different strokes for different folks.   I think all the info that is provided the better.  Put the info out there and let people make their own decisions.


Thanks for the annuity article and would like to see more info about differnet annuity products.
Paley   |     |   Comment #25
Those Israel Bonds at 3.57% for 10 yrs., are to me, very comparable to a CD, also should be considered.  They send regular interest checks 2X a year.  This fixed-rate option would make a good article for this site.  Many are not aware that they even exist.
Anonymous   |     |   Comment #30
#25 (and others)  Can someone provide any info about the "Israel Bonds at 3.57% for 10 yrs"?  Pros, Cons, how to otain them, etc.

Anonymous   |     |   Comment #31
#25  Are the Israel bonds insured in any way and by whom?  Also with the chaos between Iran and Israel would one think it is safe to consider purchasing bonds for ten years  from a country in the middle of what could become a horrible war in that part of the country?  Just curious as to what protection, if any, Israel bond holders have under these circumstances.  Thanks!
Anonymous   |     |   Comment #26

Thank you for an informative article about an investment I was not familiar with.

If CDs paid a decent rate, I would not be interested in alternative investments, but as current CD rates

are paltry, I appreciate all the objective information I can get on other conservative investments.

Martin   |     |   Comment #27
Thanks for including the info. about annuities.  They are not the right product for everyone, but for some they are wonderful.

I, like one of the other posters above, am happy to have information about other types of conservative investments.

There are so many complex choices when it comes to annuities.  It would be great to have a neutral site such as this provide a database about them at some future point (much as you have done with CD's). 

Rosedala   |     |   Comment #36
Although this is an old post, I coudn't help to comment that I'm appalled at the chuzpa of some absolutely overwhelming commenters here!!!  The total lack of respect to Ken, the owner, and his guest writers fills me with indignation!  The arrogance of these unbearable pygmies is terribly disturbing.  Nothing can be learned from them.  I'm glad Ken has removed some, but if it were I, a whole lot more would've been out of MY SITE's circulation.....for good!

If you are incapable of appreciating the real efforts that Ken unselfishly puts into this site for the members benefit, then at least shut your mouth and turn to another page where the info is always so vast!  Just choose something you like and write comments that are healthy and helpful rather than gross and offensive.