I have gotten a lot of input and feedback from agents and consumers lately regarding their concerns and hesitance on buying annuities. Let’s start off by saying that most people I encounter want safety, and income for life. This encompasses a lot of areas in between as well, but for the purposes of this blog, let’s keep it simple.
Why do I recommend an annuity? That’s easy, the client wants downside protection, guaranteed earnings, the ability to take a lifetime income, and the ability to leave something behind that goes unused. Sound like you yet? These products aren’t for everyone. If you want the most gains you can possibly get, or need a monthly sum of dollars that cannot be generated on your 401K savings due to the lack of planning. For example, $100,000 isn’t going to pay your bills for life if you need 1,000 a month for them. That’s just not how it works.
For the baby boomers that fall into the category of “fixed annuity prospects” , I would say the majority of the push back we hear is the payout percentage. Another is length of surrender period or length of contract. Another might be the rate of return NOT on the income guaranteed side. I’ll tackle these, and then you can make up your own mind.
Payout percentage. I mentioned a few paragraphs ago regarding the 100,000 and the fact that it is most likely not going to pay you 1,000 a month. That is mostly true. I say mostly because it can depend on the length of time you let your money grow at a guaranteed rate. If you have 100,000, and want to turn it on in a year, or in 30 days (which is the case most of the time) , then we are going to have a hard time finding someone to pay us out 12% a year for as long as we live. So it can be done, with proper planning.
Surrender period slash length of contract. This one we hear about quite a bit as it seems that the better guarantees and bonuses come attached to longer contracts. By longer , I mean more than 10 years. If you want a product that you can put money in, earn some interest, not lose, and walk away, then this argument is very valid. If you want income for life, who cares how long your contract is? As far as I’m concerned, it can be a lifetime contract, if it pays you out the most money, isn’t that what really matters?
The last one is rate of return, or caps. This one is simply the economy. Rates are low and not just hear. Upside potential is low. If you started planning later in life, and need 10-15% returns to get you where you need to be…well, this might not be the best place for you. However, if you can get by with doubling your money every 10 years or so, and need income, now you’re talking. The caps and rate of return don;t matter the least bit unless your upside potential is higher than your guaranteed rate.