Annuities, Why All the Confusion? – Insight Folios

Kevin WrayAcademy, Finance 101, Income Planning, Income Planning, Insight Investing Articles, Investing, Risk Management

Everywhere you look there is a different opinion on annuities. Are they good or bad? You could ask 10 different people their view of what an annuity is, and you will get 10 different answers. Why is this? First, annuities have been around a long time and the annuities of today were not available that long ago. Annuities in this country started in 1759 to form a retirement pool for church pastors in Pennsylvania, this was funded by contributions from both the church leaders and the church congregations to provide a lifetime income to their families. So, what was available then has changed dramatically now. The question is are they good or bad? It depends on your own personal situation.

Annuities come with benefits that cannot be duplicated in any other investment. Let’s look at a few.

  1. An annuity can provide an income stream that you cannot outlive.
  2. Annuities have tax deferral. Meaning if you do not take any money from the account you will not have to pay any taxes on the interest. No 1099’s
  3. They come with an Exclusion Ratio. Which simply means if you decided to take an income stream only part of the payment will be taxed and part will be excluded from tax.
  4. Some annuities have guaranteed rates.
  5. You can name a beneficiary. If you do this, once you pass away it will avoid probate.

I know what you are saying this is all good, why in the world would I not buy this tomorrow. Well grasshopper there are some reasons to consider whether or not they may benefit you.

  1. Annuities have a lack of liquidity. Meaning you have to leave your money with the company for a number of years. Typically, 5 to 10 years. If you were to cash in your account there would be a penalty and it may be a steep one to access your account.
  2. Some are very complex and hard to understand.
  3. Once you do take income or withdrawals from this you will pay ordinary income tax on the amount you take out as opposed to a capital gain tax rate.
  4. Variable annuities can come with some hefty fees some as high as 5% or so.
  5. You may get a lower return on your investment.

These are just some of the details to consider when deciding an annuity is right for you. How can you decide if one is right for you in your financial situation? In my humble opinion everyone should have a Simplictree Income Report. This report will give you the answer as to whether an annuity makes sense. We can generate one of these reports showing an annuity and by a click of a button will give you the confidence to determine if this makes sense or not. We find that most people we meet make decisions on emotion rather than logic. I encourage you to get this free report to help you make an informed decision. Call our office today and let us help you make an informed decision.