Why Annuities are Like Eggs

Eggs have had a unique reputation over the years. At first, they were good for you, then they were bad for you. Then nutritionists said that egg whites were good and the yokes were bad. Now, Yokes are ok again. So, are eggs good or bad? The answer most likely lies somewhere in between.

Annuities have gotten similar press to eggs. Some financial experts will tell you they are a rip off or they are a terrible investment and some will tell you there is no better place to put your money. The answer again is in between. Like eggs, annuities are all about balance. If all you eat are eggs and if you put all of your money into an annuity, it probably won’t work out great for you.

At its core, an annuity is a financial product. Financial products are designed to solve financial problems much like tools are designed to solve building problems. Saying an annuity is a bad financial product is like saying a hammer is a bad tool. A hammer is a good tool, but it’s a bad tool if you need to cut a piece of wood in half. Therein lies the issue with annuities, most often people put their money into annuities without fully understanding how they work. They buy them without making sure the annuity is solving the right financial problem.

Here are a few reasons to put money into an annuity:

You Need Income in Retirement:

Pensions used to be prevalent in the work force and coupled with Social Security, they would be able to cover a large majority of an individual’s retirement expenses. At the moment, pensions are all but extinct and Social Security payments don’t nearly cover a retiree’s expenses. An annuity can provide an income stream that can bridge the gap between your monthly expenses and what Social Security provides. Be sure to read the contract to understand the difference between annuitizing and a guaranteed withdrawal benefit.

You Want to Reduce Market Risk:

The stock market will increase in value and the stock market will decrease in value. That fact isn’t as big of a deal to someone who is in the accumulation phase of their life, but it can be an issue to a person withdrawing funds in retirement. Withdrawing funds in a down market means you’ll have to sell more shares of a stock or mutual fund in order to get the same dollar amount. This can create a downward spiral on the value of your investment account. A fixed annuity or one that offers a guaranteed benefit rider can mitigate this risk and allow your other investments to ride out the ups and downs of the market.

You Want a Higher Withdrawal Rate:

Most experts today agree that a 5% withdrawal rate will cause the average person to run out of money. There is even some research that states 4% may be too much as well. With a low interest environment, it can be harder to obtain those yields with “safer” investments like bonds. Like Social Security, the longer you wait to collect payments, the more the annuity will pay out. There are carriers in the marketplace that will pay a 5% withdrawal rate for individuals over 70.