Understanding Annuities: Retirement Tool

July 7, 2022

2:00 minute read – #Retirement Planning:  Religion, politics and annuities. Three things people have strong opinions about. But why annuities?

Often recognized, often misunderstood. Annuities have been around for more than our life times and have changed over the past 20 years as well.  We’re forecasting annuity sales of $267 billion to $288 billion in 2022, eclipsing the record ($265 billion) set in 2008. Consumers pumped $255 billion into annuities last year, the third-highest annual total.   – LIMRA

There are many types of annuities (Fixed, Indexed, Variable). They generally serve one of two functions: as an investment or as a quasi-pension plan offering income for life in retirement. Insurers offer buyers guarantees that hedge risk like market volatility or the danger of outliving savings in old age. Insurers have also offered consumers better payouts and guarantees on all types of annuities amid rising interest rates, which increase profits for insurance companies.

What’s the attraction? Insulation from market volatility — Sounds good right? Make sure you fully understand the product you’re purchasing.

Insurers generally charge a premium for their guarantees, which may make an annuity more costly than investments like mutual funds. Consumers also generally can’t touch their money for  a certain amount of years without penalty (See Surrender Charge Schedule, as well as a free withdrawal clause), with some exceptions. Additionally, for example, some indexed annuities will offer an upfront bonus on your incoming assets (could be 3 to as much as 9%) for the first 12 months.

With the right understanding of what this entails always use the rule of thumb ‘There’s no free lunch’. The larger the bonus amount the longer the surrender charge period of years.

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