Guaranteed Income for Life!

“You don’t retire based on your assets. You retire based on your income.”

If you recognize this phrase, you have likely had a conversation about purchasing an annuity.

The logic is sound. You are retiring; therefore, you are losing your earned income. You are losing your earned income; therefore, you need to create your own income. Once we agree that you will, in fact, need income for the rest of your life, the line of questioning often goes something like this:

Wouldn’t it be nice if that income was guaranteed for your entire life?

Are you worried about changes to Social Security?

Do you want little to no risk with your investments?

Do want to participate only when the market goes up but not when it goes down?

Do you want tax-deferred growth?

Do you want to leave an inheritance to your family?

Do you want the peace of mind to know a paycheck will keep showing up, even after you retire? Guaranteed. Every month. For as long as you live.

If you have answered yes to any of these questions (or maybe even all of them), then an annuity might be right for you!

What’s Not to Love?

Everything listed here is true about annuities. They sound pretty good! Right?

Annuities have some incredible features. Depending on the contract, they can provide guaranteed income for life, tax-deferred growth, market participation with limited or no downside risk, a death benefit to your spouse or heirs, a consistent paycheck in retirement, peace of mind, security, and safety.

But as we’ve written about before, annuity sales always tend to rise in times of market volatility, political uncertainty, and economic turmoil. And whenever you’re tempted to make a decision rooted in fear and uncertainty, that’s a sign to step back and seek counsel from trusted advisors to be sure you’re making the right choice for the right reasons.

Seek Wise Counsel

Without counsel plans fail, but with many advisers they succeed. – Proverbs 15:22

Why is this so important with annuities? These contracts are complex. Variable annuities are widely regarded as some of the most complex financial instruments on the market. Indexed annuities are a bit easier to understand, but they still carry their fair share of complexities.

How do you combat complexity? Ask great questions. Any time you are considering a new investment or income vehicle, you should feel confident answering three basic questions:

1. What is the purpose of the investment?
2. What are the risks?
3. What are the benefits?

When evaluating an annuity contract, getting down to these three simple questions can be a bit of a process. Many clarifying questions are required to get there.

Here are some questions you should be asking about any annuity you own or are considering purchasing:

• Is it deferred or immediate?
• If it is deferred, is it a fixed or variable contract?
• If it is fixed, is it indexed?
• If it is not indexed, what is the fixed rate?
• Can that rate change?
• If it is indexed, what is it indexed to?
• Is it a cap rate or participation rate?
• What is that rate?
• Is it credited point to point? Tiered? New money? Portfolio?
• Is it credited monthly or annually?
• If it is variable, what subaccounts are available?
• What is the cost of the subaccounts?
• What is the downside risk?
• Is there a buffer or a floor?
• Are you still reading this list?
• Is there a living benefit?
• Is it single or joint life?
• What is the cost of that benefit?
• Is there a benefit base or just an account value?
• How often is the benefit base stepped up?
• For how many years?
• What is the payout rate?
• Are there age breakpoints where that rate changes?
• What are the taxes on the benefit?
• Is there a death benefit?
• If so, how do withdrawals impact the benefit?
• What is the tax treatment of the death benefit?
• What is the cost of the contract?
• What is the cost of any extra riders?
• Is that cost based on the account value, the premium, or the benefit base?
• Did you make it all the way to the end of the list?

I understand you probably did not read that entire list, which is certainly not intended to be exhaustive. But if you did make it to the end, then you understand why wise counsel is important.

Seek to Understand

Keep in mind, just because annuities can be complex does not mean they are bad. What it does mean is that a healthy dose of caution should be applied until you fully understand any annuity you might consider buying.

The talking points in annuity sales are compelling. In some cases, they can be a great fit for the right client. But, to borrow a sentiment from the great Warren Buffett, “You should never invest in something you don’t understand.” You must seek to understand where you are investing your money.

If you are considering an annuity for your portfolio, we would love to walk alongside you and help you fully understand your options. Our intention is not to dissuade you from adding an annuity to your portfolio; rather, to equip and prepare you for a productive conversation regarding these contracts.

At JMA, we believe in taking a personalized and holistic approach to money management. We consider an individual’s goals, values, financial situation, and other factors when designing a well-balanced investment portfolio. If you’re worried about your retirement or feeling overwhelmed, we can help you understand your options and build a financial plan that makes sense for you.