A Banner Year for Annuities

Andrew Busa, MSPFP, CFP^®, MPAS^®, CCFC

Director of Financial Planning

Do you hear that? It’s the sound of annuity salespeople everywhere cashing their bonus checks. Projected annuityA financial instrument that pays the holder a guaranteed stream of payments. The annuity is funded by either a lump sum (one-time) or a series of deposits. Once funded, the sum is invested by the insurance company who sold the annuity (the accumulations phase). After a certain trigger (for example, the holder’s retirement or reaching a certain age) payments begin to be issued to the holder (annuitization phase). Annuity payments may be fixed or variable in both amount and in length (some pay out for a designated span of years, others until the holder’s death). sales for 2022 are in the neighborhood of $280 billion. That will surpass the previous all-time high of $265 billion set in 2008.

AnnuitiesA financial instrument that pays the holder a guaranteed stream of payments. The annuity is funded by either a lump sum (one-time) or a series of deposits. Once funded, the sum is invested by the insurance company who sold the annuity (the accumulations phase). After a certain trigger (for example, the holder’s retirement or reaching a certain age) payments begin to be issued to the holder (annuitization phase). Annuity payments may be fixed or variable in both amount and in length (some pay out for a designated span of years, others until the holder’s death). sales increase when the market is unsettled and interest rates are rising. But are all those billions of dollars chasing sound financial planning decisions?

Let’s be clear: An annuity is an insurance product. Period. It is not an investment.

Unfortunately, annuitiesA financial instrument that pays the holder a guaranteed stream of payments. The annuity is funded by either a lump sum (one-time) or a series of deposits. Once funded, the sum is invested by the insurance company who sold the annuity (the accumulations phase). After a certain trigger (for example, the holder’s retirement or reaching a certain age) payments begin to be issued to the holder (annuitization phase). Annuity payments may be fixed or variable in both amount and in length (some pay out for a designated span of years, others until the holder’s death). are often billed as investment products first and riskThe probability that an investment will decline in value in the short term, along with the magnitude of that decline. Stocks are often considered riskier than bonds because they have a higher probability of losing money, and they tend to lose more than bonds when they do decline. management tools second. We encourage clients to view them the other way around.

Annuities and insurance each seek to cover opposing sides of the longevity-risk coin. Where life insurance hedges the risk that you’ll die too soon for your financial plan to succeed, an annuity hedges the risk that you’ll live too long for your assets to support your desired lifestyle.

When we discuss annuities with clients, there are several questions we always consider before making a move:

Will an annuity truly serve your needs? An annuity may be what you need if you are legitimately at risk of outliving your assets. (Again, it’s an insurance product.) As an investment, it doesn’t hold up well compared to traditional investment vehicles (mutual funds, stocksA financial instrument giving the holder a proportion of the ownership and earnings of a company., bondsA financial instrument representing an IOU from the borrower to the lender. Bond issuers promise to pay bond holders a given amount of interest for a pre-determined amount of time until the loan is repaid in full (otherwise known as the maturity date). Bonds can have a fixed or floating interest rate. Fixed-rate bonds pay out a pre-determined amount of interest each year, while floating-rate bonds can pay higher or lower interest each year depending on prevailing market interest rates., etc.). Generally, if you are not in danger of outliving your assets even in the most volatile of market conditions, an annuity will only add complexity to a financial plan.

What are the total costs and fees associated with this product? One disadvantage of annuities is that they can be expensive. Costs to purchasers can include things like mortality and expense fees, administrative fees, investment management fees and fees for optional riders.

What is the surrender period? This is how long you must wait before incurring large fees on withdrawals.

What annuity income payment options do you have and when? This will depend on whether an annuity is immediate or deferred.

There are other important questions as well: What is the agent’s commission on the product? Does the insurance company waive withdrawal charges if you face a medical crisis?

The bottom line is that annuities aren’t inherently good or bad. Our job is to help determine if the pros of guaranteed income would outweigh the complexity, costs and risksThe probability that an investment will decline in value in the short term, along with the magnitude of that decline. Stocks are often considered riskier than bonds because they have a higher probability of losing money, and they tend to lose more than bonds when they do decline. of choosing annuities.

About Adviser Investments

Adviser is a full-service wealth management firm, offering investment management, financial and tax planning, managed individual bond portfolios, and 401(k) advisory services. We’ve been helping individuals, trustsA legal document that functions as an instruction manual to how you want your money managed and spent in your later years as well as how your assets should be distributed after your death. Assets placed in a trust are generally safe from creditors and can be sold by the trustee in short order, avoiding the lengthy and costly probate process., institutions and foundations since 1994. Adviser Investments and its subsidiaries have over 5,000 clients across the country and over $8 billion in assets under management. Our portfolios encompass actively managed funds, ETFsA type of security which allows investors to indirectly invest in an underlying basket of financial instruments (these may include stocks, bonds, commodities or other types of instruments). Shares in an ETF are publicly traded on an exchange, and the price of an ETF’s shares will fluctuate throughout the trading day (traditional mutual funds trade only once a day). For example, one popular ETF tracks the companies in the S&P 500, so buying a share of the ETF gets an investor exposure to all 500 companies in the index., socially responsible investments and tactical asset allocation strategies, and we’re experts on Fidelity and Vanguard mutual funds. We take pride in being The Adviser You Can Talk To. To see a full list of our awards and recognitions, click here, and for more information, please visit www.adviserinvestments.com or call 800-492-6868.