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Let's Talk Annuities - What are they? Do I need one? | AP Wealth Management

Let’s Talk Annuities – What are they? Do I need one?

Annuities have been in the news recently after the House of Representatives passed a bill in May 2019.  That bill encourages 401(k) plans to offer annuities. The Setting Every Community Up For Retirement Enhancement Act, known as the SECURE Act, looks to have a decent chance of making it through the senate and onto the desk of President Trump.  If that happens it will increase the chances that you will be offered and potentially sold an annuity. This may cause you to ask, “What is an annuity?”

What is an Annuity?

An annuity is a financial product sold by an insurance company.  You pay the insurance company a lump sum or payments over time.  The insurance company then gives you the option to take out a lump sum or to “annuitize” which turns the pot of money into a stream of payments over a specified period of time.

The types of annuities offered gets confusing quickly as there are many different options – you may buy an immediate (payments start now) or deferred annuity (payments start later).  Then, you may choose how to grow the money – fixed (gives you a guaranteed minimum rate of interest), variable (allows you to invest in securities such as mutual funds) or indexed (formula that is tied to overall stock index performance).

Now that your head is spinning and before you start attempting to make those decisions, you should probably step back and start with a key question: Are annuities a good fit for me?

Our Perspective

For our clients, we find that annuities are normally not a good fit.  The many different types of expenses (insurance charges, investment fees, surrender charges, rider fees, etc.) that the insurance company charges are a huge headwind to making your money grow.  In addition, you can get locked into these products for many years as most have long surrender periods. We often see unnecessary tax-deferred redundancy if you purchase an annuity in your already tax-deferred retirement account such as an IRA or 401k. In non-retirement accounts, annuities miss out on a huge estate planning benefit as they do not get the step-up in basis at death.

Annuities are often oversold under the “suitability” rules for commission sales advisors.  The good news is that we can help you figure out an exit or rescue (lower cost) strategy if you have been sold an annuity that is not a good fit.  If you would like a 2nd opinion on an annuity you are considering or have already purchased, please do not hesitate to call us at (706) 364-4281 and speak to one of our experienced advisors.

Clayton Quamme, CFP

Clayton Quamme, CFP