Week 39: Save More, Tactic 10

What can you do this week?

• Learn more about the pros and cons of annuities.

• Determine if these investments are appropriate for your situation.

What Is An Annuity?

• Annuities are another investment vehicle available for those building wealth.

• Annuities are a form of insurance.

• Life insurance protects you if you die to soon.

• Annuities protect you from living too long.

  

  Annuities Are About Income: Now OR Later

• Some are designed to provide income now, some for income later. A few varieties for in between.

• Immediate annuities convert a lump sum of money into a paycheck for life, a number of years guaranteed, etc.

• Deferred annuities allow you to save now and later take guaranteed income based off of what your account grows to in the future.

  

If You Need Income Later, Understand A Few Things

• When you take income from an annuity, it usually means your invested money has been annuitized. You are known as an annuitant.

• Annuitization means you now own a stream of income for a period of time, often the rest of your life.

• Usually when you pass away, that stream of income disappears (Joint Survivor is an option where this might not be true).

• Annuitants who live the longest, earn the most income and have the most potential return earned by annuitizing.

• The opposite is true if you don’t live very long after you annuitize.

  

  Who Wants You To Win?

• Like most insurances, some who are insured will incur claims, while more will pay premiums in excess of what they receive in claims.

• While not getting into the details, just know insurance companies make very informed bets. Their actuaries know mortality data far better than we will likely know our own ability to live past average mortality age.

• This doesn’t mean these are not good ways to earn retirement income in the future.

• A common risk in the case of the income riders added to annuities, investors will pay for that benefit in investment expense for years or decades before annuitizing.

• More often than not, they will not see the benefit of the insurance they paid for before annuitizing unless they beat the averages and collect more income than they paid in expenses.

• Instead they essentially spend their own annuity account value down before the income guarantee kicks in. The company is betting on this happening.

  

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Save With A Variable Annuity?

• If income now is not important but a guarantee of income for life in the future is desired, a deferred variable annuity is one way to do this.

• Additional benefits like guaranteed income for later can be a benefit for saving in a deferred annuity.

• These all come at a cost and make saving in these vehicles less than optimal compared to other investments like an exchange traded fund in a brokerage account in the below example.

• Tax deferral is one reason why investors save using annuities.

• If tax deferral is a reason an annuity is recommended, ensure other options that might be lower cost are explored first.

• Annuities held inside of an IRA is also common and is twice the tax deferral.

• There is no benefit to this and usually means you are paying more than you should in investment expense.

Save With A Fixed Indexed Annuity?

• Fixed Indexed Annuities are popular with risk averse investors.

• These often provide a guarantee against losing money.

• The trade off for this protection is there are usually restrictions on how much upside growth you can earn. These include caps on return and participation rates which means you only keep part of the return.

• A lower cost and more flexible solution for those interested in this approach can sometimes be found in buffered ETFs. These have plenty of trade-offs as well.

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