The Most Baffling “Negatives” about Annuities (Part Two)

We have been discussing misconceptions about annuities and how they fit within your retirement plan.  In Part One, we dispelled the fact of annuities being sold is a adverse element.  A life altering decision like a home purchase or a retirement plan require an advisor to help make the complex benefits simple and a better fit for the individuals unique circumstance.  Another common fallacy:


2. Annuities lock up your money and throw away the key!


This is a common negative thrown around about annuities.  I have even heard industry professionals, who were not familiar with the details of annuities, describe annuities this way.  First off, this is a complete misconception.  Annuities have many features that allow you to access most (and in some cases, ALL) of your money.  However, it is true that annuities do have restrictions or penalties for accessing all your money.  However, is that a bad thing?  Counter intuitively, the answer is no.


First, we are not talking about all your money, just the money you have set aside for supplementing your Social Security income at retirement.  So let me ask you this, what would you do if you could spend you entire retirement nest egg tomorrow?  Either you would succumb to the temptation of spending it and risk going broke.  Or you would not, in which case, why did you need it all again?


Secondly, and the main reason that restriction of access to your money is ultimately a good thing is that nothing happens in a vacuum.  There are three main tradeoffs in all retirement financial planning, Growth, Safety, and Access.  And these three axioms are sliding scales; meaning the more you get of one, the less you get of one or both of the other two.  Stocks give you great growth potential and you can for the most part sell them in a few minutes, however you have no safety.  In fact, most stock experts agree that the more growth you are after the greater the risk potential.  Same is true of Savings accounts at the bank, access and safety but no growth.  You can get more growth with CDs if you are willing to give up access for a set period of time.


The point is the one main feature all annuities require you give up is some access, and in return you get a great deal of safety and growth potential (again varying on how much risk you are willing to take).  However, many would agree that in retirement years giving up access to a portion of your nest egg (that you would not want to spend all tomorrow anyways) is a worthwhile tradeoff to make.

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