How much should I be allocating to some sort of an annuity?
Response: Thanks so much for writing in Robert.. I truly appreciate you taking the time to ask your question. As you know from reading or listening to anything I have ever published I am not a fan at all of rules of thumb. Everyone that walks through my door and interviews with me has a completely different set up circumstances. As a starting point for discussion, before I meet with a new perspective client I have them complete the Color of Money Survey . This is a simple test to give me an indication of their risk tolerance as well as other things that should be considered in determining asset allocation. As with any asset class, owning too much of one particular type of investment has it's risks. Individuals who were heavily invested in real estate over the last 10 years felt the affects of being heavily weighted there. Having too much of your money invested in annuities may not cause you risk of loss but instead you have liquidity concerns.
- The two biggest gripes about annuities are fees and liquidity and if you are too heavily invested in annuities a number of things have gone wrong. Here are a few things to pay attention to: When you sit with an advisor, if he/she hasn't completed a full asset inventory and risk tolerance assessment you are already starting off on the wrong foot. Not only can you not give someone appropriate guidance without knowing this information, it's impossible to determine suitability without it.
- When you are completing paperwork for an annuity there are suitability questions asking your net worth, income, liquidity, etc. Be sure that this information is completed accurately and completely as the annuity suitability officer is going to assess whether you're purchase is appropriate as well based on those numbers. DO NOT SIGN INCOMPLETE FORMS.... EVER!
- If you are truly concerned about liquidity, you probably are considering putting too much money into this type of vehicle. Although there is many advantages to owning annuity contracts as part of your portfolio, it means nothing if you are calling up your advisor 6 months or a year after your purchase and asking for your money.
The key to any portfolio allocation is balance and making sure that is in line with all your needs and risk tolerance. Taking the time to having these types of discussions will serve you well and make you sleep well at night knowing you have made great decisions with your money. Thanks again for your question.
Carl Barnowski