Annuity

[BigoBoys]

What are the thoughts on an annuity as a retirement solution? 

[Arkansasbeaux]

   There's a ton of "what if's" that come along with that question. Annuities CAN be part of a retirement but that doesn't mean they have to be or are necessarily the best option. So much of it depends on what you want to accomplish. Do you want a guaranteed stream of income for as long as you live? What about a spouse? Is a death benefit important to you? Is this money inside of an IRA or outside? How much reliance will you have on your portfolio for income? Are you willing to give full control up of the money in exchange for bigger payments or still have guaranteed income but the payments be smaller and still maintain control of the money? Would you be better off investing the money outside of an annuity due to age, or cost of the annuity? These are just a few of the questions that need to be addressed as there are so many types of annuities, not to mention riders that can accommodate them.
   The biggest knock on annuities is the cost. A basic variable annuity will have about a 1% built in mortality expense, which is every year.  I wouldn't even discuss a fixed annuity as bad as rates are, and Index annuities will get my blood boiling. Then there's the cost of any additional riders that you can purchase. They can run anywhere from .25% to 1.5% each, depending on what they are. Simply put, if you choose to use an annuity as part of your retirement, don't put more than 1/3 of your portfolio into one. Additionally, understand that the same money invested outside of annuity would perform about 1% better per year but would not have guarantees. That's the trade off, less long term earning potential but the peace of mind of having certain guarantees on the money. PM me if you have more questions or just want thoughts on your particular situation, since I kind of discussed them in general.


P.S.- As a Marine, I'm inclined to let you know I love your avatar pic of Private Pyle! Haha

[McKdaddy]

   The biggest knock on annuities is the cost. A basic variable annuity will have about a 1% built in mortality expense, which is every year.  I wouldn't even discuss a fixed annuity as bad as rates are, and Index annuities will get my blood boiling. Then there's the cost of any additional riders that you can purchase. They can run anywhere from .25% to 1.5% each, depending on what they are. Simply put, if you choose to use an annuity as part of your retirement, don't put more than 1/3 of your portfolio into one. Additionally, understand that the same money invested outside of annuity would perform about 1% better per year but would not have guarantees. That's the trade off, less long term earning potential but the peace of mind of having certain guarantees on the money.

A lot of ^^^^ in the above post.

[BigoBoys]

Thanks!

[BigBrandonAllenFan]

Annuities are fine if you have all the money you are going to need for your retirement.  If this isn't the case, learn how to buy and sell mutual funds.  With mutual funds, if one company goes belly up that is supported by the fund, you might get a 2 to 3 percent drop in stock price, that's about it in most cases... In turn, the other like companies in the fund take up the void filled by the belly up company and in a month the difference is not even measurable in the stock price.  If the market is bulling ahead, the mutual fund will usually bull ahead right along in corcordance, regardless of the belly up thing.  The other scenario is, if you own stock exclusively in that company that went belly up, you're freakin' broke.

[JoeyCapital]

Annuities are fine if you have all the money you are going to need for your retirement. 

That may have been true 15 yrs ago, but it's not true now.

With a lot of modern variable annuities you can easily build a portfolio comparable to a mutual fund portfolio. Even though the VA sub accounts can't be called mutual funds, the only real difference is in the name. They can be used very successfully as accumulation vehicles, as long as you understand you're paying 1-2% more for this investment, so your performance will be that much less.

The deal with annuities is understanding the costs and the benefits. The costs are high expenses and limited access to your money. The benefits are income for life or some form of increasing death benefit.

They aren't right for everybody, and due to the higher costs over time your performance will lag most other investments. With that said, a lot of people simply like to know that their income won't be cut even if the market craters.

[BENTON PIGGEE]

Annuities are fine if you have all the money you are going to need for your retirement.  If this isn't the case, learn how to buy and sell mutual funds.  With mutual funds, if one company goes belly up that is supported by the fund, you might get a 2 to 3 percent drop in stock price, that's about it in most cases... In turn, the other like companies in the fund take up the void filled by the belly up company and in a month the difference is not even measurable in the stock price.  If the market is bulling ahead, the mutual fund will usually bull ahead right along in corcordance, regardless of the belly up thing.  The other scenario is, if you own stock exclusively in that company that went belly up, you're freakin' broke.

Why mutual funds and not exchange traded funds? Retirement account restrictions?

[BigBrandonAllenFan]

Why mutual funds and not exchange traded funds? Retirement account restrictions?

Greater potential for gain.   Less potential for loss.

With a mutual fund there may be 20 to 100 companies of like industry bundled in the fund.  It's like a safety net.

On the other hand, with exchange traded funds (I assume you mean as in individual companies within the DOW), if the company's stock you own goes bankrupt, you lose everything pretty much.  Scandal is always a lurking monster in the individual stocks catagory too.  One bad mess, recall, embezzlement, ect, can QUICKLY cost you a chunk of money.

I'm really not sure what you mean by "exchange traded funds" though.  If I missed, maybe you can define for me.

[ricepig]

Greater potential for gain.   Less potential for loss.

With a mutual fund there may be 20 to 100 companies of like industry bundled in the fund.  It's like a safety net.

On the other hand, with exchange traded funds (I assume you mean as in individual companies within the DOW), if the company's stock you own goes bankrupt, you lose everything pretty much.  Scandal is always a lurking monster in the individual stocks catagory too.  One bad mess, recall, embezzlement, ect, can QUICKLY cost you a chunk of money.

I'm really not sure what you mean by "exchange traded funds" though.  If I missed, maybe you can define for me.

http://www.investopedia.com/terms/e/etf.asp

[PEtrader]

Don't do annuities.

The only thing they are good for,  which can be a legit reason,  is to keep you from spending all your money.   

[BigBrandonAllenFan]

http://www.investopedia.com/terms/e/etf.asp

Thanks RicePig.  Great article.  Now I know, and I also know after reading the article why I didn't know.  Any stock for which I can't get the day ending price is useless for me.

I'm a Fidelity mutual fund guy.  Anything outside that is not my territory.

[hog.goblin]

Don't do annuities.

The only thing they are good for,  which can be a legit reason,  is to keep you from spending all your money.

They are also good for making money, if you sell annuities...

All joking aside, sometimes they can act as a glorified CD in declining interest rate markets.