Have You Heard about Annuities?

There's a lot of confusion in the financial realm these days around annuities. Much of what people hear regarding these financial tools are misconceptions. You must understand annuities before deciding whether to include them in your Financial Independence Roadmap?.

At Lord and Richards, we meet with people daily to discuss how to retire financially independent. We define financial independence as being able to do what you love with the people you love and not having to work to pay for it. For most people we talk to, that's what they want for their retirement.

According to data from the Social Security Administration, Social Security makes up almost a third of some retirees’ income, and often, as much as a third of their income comes from working. The question is how to avoid that trap of working in retirement-- unless that's your choice because you love your work.

Many people we speak to are worried that events out of their control could disrupt their retirement plans. At Lord and Richards, we help you build a Financial Independence Roadmap?. It's a comprehensive financial plan that addresses the critical areas of your finances to ensure you never face a financial catastrophe and never go through bankruptcy in retirement.

When you design your portfolio and construct your financial house, there are tools that can work for you, but if you don't know how to use them correctly, they can work against you. One of those tools is an annuity. There's a right way and a wrong way to utilize an annuity.

For example, if you work for a company that still offers pensions, your pension is a lifetime income stream derived from an annuity. An annuity is a way to get lifetime income. It's an immediate annuity if you procure it for yourself. This is where people sometimes get confused. They believe that if you don't use up the annuity during your lifetime through income withdrawals, any remainder after your death is left to the annuity company. That may be the case if the immediate annuity was set up that way. However, there are other ways that money may continue to pay out to your family long after you're gone. It's all in how the annuity is designed and constructed.

Here's the key. When you include an immediate annuity in your portfolio, its purpose is to generate a lifetime income. That's it. If you have other needs to address with your dollars, you might want to step back and consider something different.

Another variety of annuities is a fixed annuity, which our country started regulating over 100 years ago as a kind of insurance. A fixed annuity is different from an immediate annuity. The money you put in is contractually guaranteed and backed by the annuity company, so you won't lose your money. You can either take your funds out when they've grown to a certain amount or turn on some form of income in the future. That's a simple fixed annuity.

I like comparing fixed annuities with bank CDs because they are competitors. In today's rate environment, it's easy to get a principal-protected bank CD that will pay a reasonable amount of interest. Historically, we're hitting up against numbers like 4-5%. Sometimes you can go a bit longer on your CD term and enjoy the historically high rates we're experiencing now.

Savers are being rewarded in today’s high-rate environment with fixed annuities. They're great tools to deposit and forget money. Often, clients may use a fixed annuity to get a guaranteed rate of return with no worries, and some clients benefit from that.

Years ago, annuity companies developed a variable annuity, which means your principal is not fixed or guaranteed but is invested in the market. Variable annuities can be expensive if you want to take lifetime income. Fees can range from 1.5-6% or more. That's a costly tool.

Variable annuities are expensive because they were a response to clients looking for more growth in their investments before taking income. That's all that happened, and it created a lot of costs. There's nothing wrong with owning a variable annuity, but there may be a better path. In a subsequent article, I will look at a different tool that could blend the worlds of immediate, fixed, and variable annuities without incurring high fees.

That's an exciting prospect. You could form a conservative principal-protected foundation in your portfolio. Annuities may or may not be suitable for you and may or may not work well in your Financial Independence Roadmap?. The key is to have a conversation with the Lord and Richards team to determine if you're on track to achieve financial independence.

We call our simple process a Financial Independence Review?. It's a dialogue where you share your goals, dreams, and values. With the information you give us, we make a careful study, looking at both the past and the future relative to your current financials. We consider how your current setup would have done in the past and what it might look like simulated in the future.

This process is vital. At Lord and Richards, we specialize in helping you achieve financial independence so you can retire without worry. My team and I would love to have a conversation with you. Give us a phone call or visit our website at www.lordandrichards.com.