Should You Buy an Annuity? Retirement Planning

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What Is an Annuity?
Annuities are contracts issued and distributed (or sold) by financial institutions where the funds are invested with the goal of paying out a fixed income stream later on. They are mainly used for retirement purposes and help individuals address the risk of outliving their savings. Upon annuitization, the holding institution will issue a stream of payments at a later point in time.

Annuity Types
Annuities can be structured according to a wide array of details and factors, such as the duration of time that payments from the annuity can be guaranteed to continue. Annuities can be created so that, upon annuitization, payments will continue so long as either the annuitant or their spouse (if survivorship benefit is elected) is alive. Alternatively, annuities can be structured to pay out funds for a fixed amount of time, such as 20 years, regardless of how long the annuitant lives.

Annuities can also begin immediately upon deposit of a lump sum, or they can be structured as deferred benefits. An example of this type of annuity is the immediate payment annuity in which payments begin immediately after the payment of a lump sum.

Deferred income annuities are the opposite of an immediate annuity because they don't begin paying out after the initial investment. Instead, the client specifies an age at which they would like to begin receiving payments from the insurance company.

Fixed and Variable Annuities
Annuities can be structured generally as either fixed or variable. Fixed annuities provide regular periodic payments to the annuitant. Variable annuities allow the owner to receive larger future payments if investments of the annuity fund do well and smaller payments if its investments do poorly. This provides for less stable cash flow than a fixed annuity but allows the annuitant to reap the benefits of strong returns from their fund's investments.

While variable annuities carry some market risk and the potential to lose principal, riders and features can be added to annuity contracts (usually for some extra cost) which allow them to function as hybrid fixed-variable annuities. Contract owners can benefit from upside portfolio potential while enjoying the protection of a guaranteed lifetime minimum withdrawal benefit if the portfolio drops in value.

Other riders may be purchased to add a death benefit to the agreement or to accelerate payouts if the annuity holder is diagnosed with a terminal illness. The cost of living rider is another common rider that will adjust the annual base cash flows for inflation based on changes in the CPI.

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#Annuity #Retirement #FinancialPlanning
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DISCLAIMER:
This video is for entertainment purposes only. I am not a legal or financial expert or have any authority to give legal or financial advice. While all the information in this video is believed to be accurate at the time of its recording, realize this channel and its author makes no express warranty as to the completeness or accuracy, nor can it accept responsibility for errors appearing in this video.

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[nickdoyle-achievefinancial]

Annuities are designed to protect against two major risks retirees face: 1. Longevity Risk: When someone retires they have to design their retirement plan to last until they die. But when will they die? 80, 90, 100? You probably decide to plan for roughly the worst case. In order to increase the probability a portfolio will last, a higher stock allocation may be needed which increases #2 Sequence of Returns Risk: If the market performs very poorly the first couple years of your retirement, your odds of running out of money increase dramatically. If self-insuring, you have to plan for the worst case (and spend much less) or risk running out of money if you live longer than expected or sequence of returns are bad. An annuity lets you pool these risks, so you can plan for the average case and have a possibly higher guaranteed monthly income for life. This means you can spend more like you will only live until age 82, instead of possibly 100. Maybe ~85-95% (speculating here) percent of cases it would be better to self-insure, but some people aren’t comfortable with say a 5% chance of running out of money. I don’t think basic SPIAs or DIAs are that bad, if you want to insure against these risks. Depending on risk tolerance, it may make sense to have annuities to cover necessary living expenses.

[atillathahunk]

You forgot to mention the part where an annuity protects you from any downside risk from the market. I bet when covid hit and the market tanked annuities were looking particularly attractive.

[Keneth]

Every week I buy more of whatever is the lowest percentage of my portfolio and try to keep everything around 10%. Please what could be my safest buys with $400k to outperform the market in 2024?

[travis]

IMO "financial advisors" who work on commission shouldn't be allowed to call themselves financial advisors. They are insurance salesmen.

[missouri]

I purchased a FIA 8 years ago for around $500k. It continues to be the best decision I have ever made. Why? Because I bought it to be my "bond" part of my portfolio. It is my "40%". Today. July 16, 2022 with the market down over 20% my so called 60% stocks are now worth less than my "40%".
This video simply makes no sense. I am about to retire in a few months because of my because my stock portfolio is down rather I can retire despite my stock portfolio being down 30%.
Jake, I love your videos on things such as which platforms to when it comes to something like this you just do not know what you are talking about.

[HungNguyen-sedn]

Fixed annuities have no fee and not impacted by the market!😂

[cyasutomi]

How will your 4% withdrawal strategy fare if you started retirement in 2022 or 2008 when markets were down -19% and 38% respectively? Doesn’t your math breakdown if I retire in a negative market year?

Also wondering if your assumption that stocks return 10% per year is fair if Vanguard and Fidelity believe the stock market will average 3.2% per year for the foreseeable future.

I’d prefer the guarantees of an annuity so I don’t have to worry about stock performance in retirement.

Thank you.

[kevinedward]

Doesn't each state cover up to $250k in the insurance company goes under?

[davidweden]

Jake, I agree that annuities are not a great option, but I think you forgot a couple things. First, all the income from an annuity, when purchased in an IRA, are taxable, but if you buy an annuity with after tax dollars, the insurance company will break down the taxable and non-taxable portions. Second, unlike equities over the long term, annuities are not indexed for inflation, so they can be risky in that sense. I would NOT buy annuities for several reasons. First, the selling process. The sellers of annuities can be paid up to 10% of the notional amount, which is very steep. Second, insurance companies have way more experience that we do about mortality risk, so they will always have an edge over the buyer. While it may be more expensive, I think the best option is to manage assets and withdrawals carefully. The insurance company is betting you cannot do that.

[jarrettpierce]

I always knew investing in the index was better but not specifically why, thanks Jake

[catholicexplorer]

I was talked into a variable annuity 5 years ago. Put in 50000. 3.25 % guaranteed. When I learnt about stock market, I pulled out everything and invested during the covid crash. I had to pay the penalty, but I more than made up in gains in the last 1.5 years.

[DavidEVogel]

If you listen to Sunday morning radio, you are likely to hear someone selling annuities. But the word "annuity" is never mentioned. Just claims like "Your principle never goes down" and "When you die you will leave your spouse $$$." Each of these statements has some truth to it. An annuity is a mix of an investment program and a life insurance policy. The rules, like when can you take out your money, are complicated as hell.

My NO comes from an old investment rule: If you don't understand it don't buy it.

[shawnn]

You are correct. Each state has a fund for insolvency, that amount may vary depending on the state the annuity was written in.

[cartracer]

i was looking into a guaranteed future income annuity at 9.30 percent fixed. no fee as the insurance company pays the selling agents commission. it also has a cash refund included for a beneficiary if they don't pay you your initial premium. i do understand this is irrevocable contract and there is no way your money can grow but if you live a long life the payments you received would be your growth. contract at 60 with payments starting at 65 for lifetime. no market risk.

[HungNguyen-sedn]

The fixed annuities are worthy considerations for me as they are simple, no fees and.not in the market. However, you must not be greedy and conservative investors and acceptable to 5+% rates. ❤

[howardedward]

Multi Year Guaranteed Annuities are very good values. The behave like CD's but have tax and distribution benefits. Pay upt o 6% for fixed terms.

[dougwahr]

What about a MYGA - at 6% a year interest for 8 years with full return of principal?

[edmondinc]

YES! Thanks for speaking TRUTH. It never made common sense to me to turn your money over to a company or ANYONE and have them pass it back out to you.

[anthonyjordan]

I often thought about buying a 100K annuity but then realized if I took 5 quality non-destructive NAV (Net Asset Value) CEFs of 3 equity CEFs and 2 bond CEFs, putting 20K into each, I'd be so much better off with monthly income and also have the $ available if I need it.

[djpeteskix]

TY for pointing out the following: High fees, not your money anymore, no real tax benefits.