Annuities – The Good, the Bad, and the Ugly

Many investors have a very defined opinion on annuities, which may stem from a previous purchase, something they’ve heard from a friend, or a misunderstanding of what annuities are and how they work. Bob Wamhoff, President of Wamhoff Financial Planning & Accounting Services, explains.

What is an Annuity?

  • Annuities are investments with insurance wrapped around them, offered by insurance companies
  • They can help mitigate risk of market fluctuation in a portfolio.
  • Annuities may allow you to invest in most of the same funds that you would normally use – mutual, bond and alternative funds with added protection for income.

Two Main Phases for Annuities:

  • The Accrual Phase – this is the period of time that you’re investing money into the annuity and not taking income of withdrawals from it.
  • The PAYOUT Phase – the period of time when you are taking income from the investment to supplement your income needs in retirement.
  • Most advisors avoid the payout phase until ultimately necessary, and they take an income as needed without locking in a payout amount by annuitization.

What You Need to Know About the Payout Phase:

  • There are many ways that the payout phase can happen depending on the annuity and/or the choices you make in terms of how you’d like the payout to happen.
  • You may choose to receive payout over a period of time, or “annuitize” the annuity. In that case, the insurance company takes control of the lump sum invested and gives you a stream of income. Once you make this choice, you cannot change it, so carefully consider your situation before making the decision.
  • Most annuities do not require you to annuitize the contract until you have reached age 95, allowing you to take out the money as you wish.
  • Some annuities offer an income based upon a calculated value determined by your original investment, and the growth of that income benefit over the time period that you have invested the funds. This can help you determine how and when to begin taking your money out.

Things to Consider About Annuities:

  • An annuity may (or may not) be an appropriate choice for your portfolio. Talk to a financial planning professional to help you determine what may bake best sense for your situation.
  • Be careful of those who either blatantly attack annuities as wrong for everyone, or aggressively promote them as right for everyone. Everyone’s situation is unique, so there is no right or wrong answer.
  • A diversified approach to investing based on your risk tolerance and goals will help to uncover what may be the appropriate mix of investments and products for your portfolio.
  • Having annuities as part of an overall portfolio can be more beneficial than having the majority of your investments in any one vehicle.