By SJS Senior Advisor Gary Geiger
If you were to ask one hundred investors to describe or explain an annuity, you would likely get nearly one hundred different answers – some of them accurate, and others probably less so.
“Annuities are among the most bought, least understood” financial products, says Tim Maurer, of CNBC. One of the most common questions I hear from clients is, “What is an annuity, and how does it work?” When it comes to annuities, there are many, often complex, options out there, and it’s easy to understand the confusion. So how can you tell if an annuity is a good option for you?
First, the basics: annuities are long-term investments created by insurance companies and designed to help you achieve retirement or other long-term goals. Annuities provide the benefit of tax-deferred growth of earnings while your funds remain invested within the annuity.
Annuities may come with drawbacks, however. In general, all annuities lack liquidity and carry significant surrender charge penalties – which can be as high as 20%, and last for more than 15 years – should you decide to withdraw your money before your set term is up. Regardless of when you withdraw, all gains are taxed at ordinary income tax rates, not as capital gains.
There are three main types of annuities: fixed, variable, and equity-indexed, with variable annuities being the most common. Here is a quick overview of each type:
Fixed
Fixed annuities can be described as similar to a bank-issued CD. A fixed annuity pays you a guaranteed rate of interest for a set term.
Advantage: A fixed annuity may be an appealing choice if you are an investor who is cautious about the market’s ups and downs.
Disadvantage: If you choose to invest using a fixed annuity for an extended period of time, you could find that the rates do not keep pace with inflation or other comparable investments.
Variable
Variable annuities allow you to select how your money is invested within the available subaccounts, which are investments similar to mutual funds. During your retirement years, you may be able to convert the annuity value into a stream of income, which is determined by the performance of your investments.
Advantage: A variable annuity allows you to invest in stock and bond mutual funds, offering you an opportunity to earn a greater return.
Disadvantage: Variable annuities often have very high fees. Ongoing administrative, insurance, and management fees can add up to as high as 2% to 3% annually. Combine these costs with rider fees, and the annual costs can easily exceed 3% per year. There is also more risk associated with the investments, which can cause the value of your annuity to decline.
Equity-Indexed
This type of annuity is a combination of a fixed and the variable annuity. As with fixed annuities, your account comes with a guarantee of your principal.
Advantage: Your account return will be tied to the performance of a benchmark index; therefore, you have a chance to earn a greater return if your benchmark goes up.
Disadvantage: Equity-indexed annuities are typically very complex and come in a wide variety of forms. Because there are so many different versions and moving parts, the formulas and index participation rates can be difficult to understand.
For all three types of annuities, there are a number of options for converting the annuity value to a stream of payments, including lifetime payments, or payments for a specific period of time. This is called “annuitizing.” The ability to convert the annuity to these payments can help alleviate the fear that you may outlive your assets.
Additionally, you can typically purchase separate “riders” or options that pertain to withdrawal benefits and death benefits. These riders can vary from one annuity to another, or even from one insurance company to another. There are many, many payout options available, which can increase the complexity and lead to confusion.
Here at SJS, we understand that your future is important, and we know that annuity investments can be complicated, as there are so many variations available. It is important to understand what is guaranteed along with the rules to reap the potential benefits of annuities. Although we do not typically offer annuities as a primary investment tool because of their complexity and cost, we can help you evaluate any annuity you may already own. There may be more tax-efficient and less expensive ways to achieve the same outcome you’re seeking. We’ll be here every step of the way to help you determine the best options to reach your desired investment goals.
Suggested Reading
SJS Investment Services has been recognized in CNBC’s 2024 FA 100 list, an annual ranking of registered investment advisory (RIA) firms within the USA.
SJS Investment Services has been recognized in the Forbes / SHOOK 2024 list of America’s Top RIA (Registered Investor Advisor) Firms.
Every four years, we get the same question (whether you have asked it, or you are thinking it) – how will the election affect my portfolio?
As we approach the end of the year, we want to highlight some important financial items to review before the new year.
This Outlook includes our discussion of election time, financial to-dos before the end of the year, new SJS Perrysburg office, SJS Team updates, and looking forward to Q4 2024.
SJS Investment Services has been recognized in Financial Advisor Magazine’s 2024 Registered Investment Advisor (RIA) Ranking, an annual ranking of independent investment advisory firms within the United States.
As I approach my 40th anniversary as a financial advisor, I can't help but look back on the road I've traveled.
While people commonly hold their cash within checking and savings accounts, we want to highlight three short-term, interest-bearing investments that can be held within your investment account.
This Outlook includes Founder & CEO Scott J. Savage’s gratitude for your 40 years of trust, how you can earn more interest on your cash, welcoming new SJS Team members, and looking forward to Q3 2024.
For five graduating high school Seniors who shadowed us recently, we asked each student to write a summary of what they learned during the week.
One of The Ability Center’s services is the Assistance Dog training program, which helps individuals with disabilities achieve greater independence.
When working with investment managers, we want them to share that same client-first philosophy and sit on the same side of the table with us.
We want to emphasize some best practices that can help us work together to ensure your information and assets remain safe.
The Outlook includes our evolving MarketPlus® Investing philosophy by standing on the shoulders of giants, and ways to help protect your personal information and financial assets. We also highlight The Ability Center and look forward to Q2 2024.
SRDAX is a shining example of the value alternatives can bring to traditional stock and bond strategies.
As we begin the new year, we have some ideas for concrete actions to start your new year on the right foot, financially.
Isn’t this picture magical? It's Main Street in Sylvania, Ohio, the small town where I founded SJS over 28 years ago!
The SJS Q4 2023 Outlook includes our insights on small town values, MarketPlus® Investing, and planning financially for the new year. We also highlight new SJS Team members and look forward to Q1 2024.
To help you financially plan for 2024, we provide this resource with important numbers for the upcoming year.
SJS Investment Services has been recognized in the Forbes / SHOOK 2023 list of America’s Top RIA (Registered Investor Advisor) Firms.
In addition to family gifting, many individuals support giving to organizations that aim to help their communities. We highlight some strategies to make the most of your giving dollars.
You can consider putting excess cash into a money market fund, short-term U.S. Treasury bonds, or a short-term bond mutual fund / ETF.
The future of the housing market is uncertain, and its resilience will be a crucial factor in the broader economic landscape.
The SJS Q3 2023 Outlook includes our insights on gifting and charitable contributions as well as U.S. real estate. We also look forward to Q4 2023.
SJS Investment Services has been recognized in CNBC’s 2023 FA 100 list, an annual ranking of registered investment advisory (RIA) firms within the United States.
International Samaritan is a 501(c)(3) nonprofit organization that is working to break the chains of poverty and improving lives, particularly within garbage dump communities worldwide.
SJS has been recognized in Financial Advisor Magazine’s 2023 Registered Investment Advisor (RIA) Ranking, an annual ranking of independent investment advisory firms within the United States.
The SJS Mission is to empower you to build a better life. That extends to our teammates, clients, and community members.
The SJS Q2 2023 Outlook includes our insights on building up our local communities as well as market performance so far in 2023. We also share even more members of the SJS family and look forward to Q3 2023.
It’s important to recognize how difficult it is to predict what will happen in the short-term for investment markets, and how much margin for error there should be for any prediction.