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Annuities: Fact and Fiction

Putting together a successful retirement strategy that takes into consideration investments, taxes, income needs (including social security), medical/healthcare needs and estate planning is like fitting together the pieces of an intricate puzzle. The one major difference in this metaphor is when it comes to your retirement puzzle, some of the puzzle pieces are constantly changing! As a result, the puzzle is never really finished. You have to constantly work with your plan to make sure it’s headed in the direction you want it to go.

When you consider the part of your retirement plan that deals with your income needs, the safety of guaranteed income streams offers some very strong appeal. And, when it comes to guaranteed income, many financial advisors recommend annuities, which may offer the peace-of-mind of consistent monthly income that could outlast your retirement years.

But, what exactly are annuities?

About Annuities

Annuities are tax-deferred financial products offered by insurance companies. They are contracts with the insurer and based upon the claims-paying ability (or financial soundness) of the insurer. Traditionally, annuities are designed to pay you income at some point in the future in exchange for premium payments you put into the contract that is then enhanced by the contract’s interest or investment performance over time. Converting your premium payment into an income stream is called annuitizing the contract. Payments can last for fixed periods of time, as long as you live – or even longer. On the surface this sounds great, but annuities can be complicated and are among the most commonly misunderstood and at the same time misused financial products.

Because there are so many different types of annuities it’s not appropriate to make a claim “all annuities are good” or “all annuities are bad”. That’s like making a statement akin to “all movies are good” or “all movies are bad”. And, there are as many opinions regarding annuities by both financial professionals and consumers as there are annuity products. Professional opinions of advisors tend to be agenda-driven by non-fiduciary sales professionals in the financial services industry. Consumer opinions, on the other hand, tend to be emotionally-driven rather than by facts and logic. Most often they are based on a negative experience personally or from a friend who got “burned” typically by an inappropriate recommendation. What are the facts versus the fiction on this topic? Let’s explore a few that come up quite often.


Annuities are just too expensive.

FACT: First of all, the cost of the annuity is dependent on the type of annuity…and as we’ve pointed out, there are many different annuity types. In a broad sense, there are variable and fixed annuities. Within these broad categories, there are additional variations as well.

Some believe variable products, which transfer investment risk to the annuity owner (you), are terrible because of:

·      High fees…which typically can be 2+%, before investment fee’s, depending on riders and other factors

·      Steep early surrender penalties

·      Limited investment options

·      Longer contract terms, and other factors

For variable annuities, the investment return and principal value of the variable annuity investment options are not guaranteed. Variable annuity subaccounts fluctuate with changes in market conditions. The principal you invest in the annuity may be worth more or less than the original amount invested when the annuity is surrendered.

Fixed and Indexed Annuities

Some think fixed annuities of various types, whether immediate or deferred, fixed-rate or indexed, have some of the same problems, although they are typically less expensive in aspects related to fee/cost when compared to variable products.

Fixed Annuities are long term insurance contacts and there is a surrender charge imposed generally during the first 5 to 7 years that you own the annuity contract. Withdrawals prior to age 59-1/2 may result in a 10% IRS tax penalty, in addition to any ordinary income tax. Any guarantees of the annuity are backed by the financial strength of the underlying insurance company.

Indexed annuities are insurance contracts that, depending on the contract, may offer a guaranteed annual interest rate and some participation growth, if any, of a stock market index. Such contracts have substantial variation in terms, costs of guarantees and features and may cap participation or returns in significant ways. Any guarantees offered are backed by the financial strength of the insurance company. Surrender charges apply if not held to the end of the term. Withdrawals are taxed as ordinary income and, if taken prior to 59 ½, a 10% federal tax penalty.  Investors are cautioned to carefully review an indexed annuity for its features, costs, risks, and how the variables are calculated.

No matter what type of annuity you’re considering, the truth is, any product can be expensive if used improperly.

Just as with any financial product purchase, you should consider the investment objectives, risks, charges, and expenses carefully before investing in Variable Annuities. The prospectus, which contains this and other information about the variable annuity contract and the underlying investment options, can be obtained from the insurance company or your financial professional. Be sure to read the prospectus carefully before deciding whether to invest.

How To Determine if An Annuity is Right for You

The first step in determining if an annuity is a good solution for your retirement income plan is to have your advisor do a cost/benefit analysis for you.

A thorough annuity cost/benefit analysis should cover the following key points:

·      How, specifically, a recommended product is in your best interest

·      Comparison of fees versus alternatives

·      Understanding if the advisor earns a commission and how that impacts you for good or bad

·      What the advisor’s process of discovery is for finding the right product fit

To summarize, in context, there are no bad annuity products per se, just bad application of them. If a product of any kind doesn’t fit your needs, it shouldn’t be recommended as part of your income plan.


Annuities are great for income in retirement but that’s about it.

FACT: I would say that this statement is partially true. It is true that annuities are designed primarily for income and with the advent of some of the newer lifetime income riders*, they have become even more flexible and attractive in this respect. However, the notion that variable annuities and stock or bond markets directly are THE place to go to meet the needs of a retirement plan is simply outdated. Why? Because there is an inherent risk in these areas.

Alternatively, fixed indexed annuities are not used just to provide a predictable income any longer and they don’t necessarily need the risk exposure of the market to perform quite well. For instance, fixed products can be designed as individual bond replacement strategies. They can be laddered like cd’s and more.

For example, it is not uncommon anymore to use fixed indexed annuities alongside a solid investment plan to diversify various risks. This is not to say that all fixed annuities are good for such things nor that the ones that are good perform well all the time….because products are constantly changing and evolving for various reasons. However, you have the same issue in the debt and equity markets.

It’s true not every retirement plan needs an annuity. Fixed and fixed index annuities typically will NOT in the long-term deliver an equivalent rate of return when compared to the stock market. However, as Roger Ibbotson, Ph.D. and Professor Emeritus of Finance at Yale, concluded in his recent study on fixed indexed annuities with Zebra Capital Management, LLC, “FIA’s (fixed indexed annuities) have many attractive features as both an accumulation investment and as a potential source of income in retirement.” Bottom line: annuities, particularly fixed indexed annuities, are not just about income anymore! Primarily, it’s about outsourcing various types of risk.


The insurance company will keep my annuity money if I die during the income phase.

FACT: This can be true or false. If you are utilizing annuities for income in a traditional fashion through annuitizing the contract, it is possible this could happen. Whether or not this happens depends on the payout choice you make and the date of death of you and your beneficiary. However, with the variety and flexibility of products today, the likelihood of this happening is almost non-existent with a knowledgeable advisor.

There is so much more to consider when it comes to these products but our goal here was to dispel some common myths regarding annuities. I hope you found this helpful. Remember, a plan should always precede a product. If your adviser is pushing you to products without a plan, you’re just getting sold.

If you’d like to learn more, consider our complimentary Game Plan Retirement Review, we’d be happy to help you put your retirement puzzle pieces into place. Contact us and let us know your questions. We are always excited to make new friends!

Wotton Financial Group, Inc. does not offer legal or tax advice. Please consult the appropriate professional regarding your individual circumstances.*Riders are available for an additional fee – some riders may not be available in all states.


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Retirement Savings

Are You Saving Enough for Retirement? Probably Not!

There is a significant retirement savings gap going on in America. Where do you stand regarding retirement savings?

According to this survey by the Transamerica Center for Retirement Studies, the median retirement savings by age in the U.S. is:

  • Americans in their 20s: $16,000
  • Americans in their 30s: $45,000
  • Americans in their 40s: $63,000
  • Americans in their 50s: $117,000
  • Americans in their 60s: $172,000
As you can plainly see, not even the median amount saved by those in their 60’s is enough to last through the years of retirement, based on increasing life expectancy. But, how much is enough?
Consider this “rule of thumb” given by some financial experts on how much individuals should be saving for a goal of retiring by age 67:
  • Americans in their 30s: 1–2 times their annual salary
  • Americans in their 40s: 3–4 times their annual salary
  • Americans in their 50s: 6–7 times their annual salary
  • Americans in their 60s: 8–10 times their annual salary

That means, for example, someone in their mid-forties making $75,000 a year should have up to $300,000 in retirement savings—over 4 1/2 times what most Americans have saved. You can find the details in this excellent article.

Although I can’t say I agree with all the details and recommendations in their entirety, the overall principle of saving more than you probably currently are is sound advice. The pressing questions you need to ask yourself is: “Where do I stand today relative to savings and what do I need to do to get where I need be?”
The answers to these questions involve financial planning that should address multiple areas of concern headed to and through the retirement years (for more on that, look here). Despite the “common rules” presented in the article, saving and planning for retirement is seldom a cookie-cutter approach. There’s just typically too many factors in play.
As a fiduciary with your best interest in mind, we’d be honored to help you in your journey toward your goals.
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Common Retirement Planning Mistakes – Part 4: Having a Strategy Prevents Flexibility for the Lifestyle I Want

This the final article in a four-part series on common retirement planning mistakes and how to avoid them.

Over the last three articles (part 1 here, part 2 here, part 2 here), we have visited three common misconceptions about retirement planning:

  • Retirement strategies are just for the wealthy
  • Putting away a consistent amount of money every month is enough, and
  • All financial professionals are exactly the same

If you don’t remember the details of those articles, I urge you to find them and read them again. Email me and I’ll send you a transcript. It’s important stuff. Hopefully, though, having read the articles you now realize that having a strategy for retirement is vital for everyone no matter what their asset level or income situation is, that putting money away consistently is a good start but not a plan unto itself and that different types of financial advisors have differing standards by which they must operate. In many ways, this last fact, the differing standards, is extremely important because only fiduciaries (ie investment advisers) are required to do what is in their clients’ best interest rather than what could benefit them personally or benefit their firms.

Even with all of the education you have received in these articles, you may still be hesitant to sit down with an investment adviser because of the fourth misconception. If you are afraid that having a retirement strategy actually locks you into a pre-determined lifestyle thus preventing you from having the flexibility to change things when you want, you are actually operating out of a misconception.

It is true that not having a plan may give you the flexibility to make decisions in your retirement on the fly. These decisions might include whether you want to work at Walmart or McDonald’s and which child you are going to move in with because you cannot support yourself. That may sound harsh and there’s not inherently anything wrong with these decisions in and of themselves per se’, but these are not the type of retirement goals we hear from clients very often. In fact, it’s what most of them want to avoid. Unfortunately, however, this could be a painful reality for those with a poorly constructed or even non-existent retirement strategy.

A successful retirement strategy has two phases, accumulation and preservation/distribution, both of which are incredibly important as we discussed in the second article of this series. Even if you are at the end of the accumulation phase and have never planned, that doesn’t mean it’s too late to implement a plan. We have clients who have done so 5-10 years or more into retirement. No, that’s not the most optimal route, but still better than nothing as you still need a strategy to distribute your savings. This may include what types of strategies are needed for your income needs and what types are needed for continued growth to fight inflation and meet future income needs. A strategy that seeks tax efficiency and finds the right balance of risk protection in the remaining assets may help to improve your retirement lifestyle and possibly provide an answer for the very thing that was preventing you from seeing a professional —the fear of inflexibility.

A well thought out strategy actually provides you more options in retirement whether it’s travel, helping grandkids or simply donating to a charity you are passionate about. The key is, though, it will be your choice. It will not just be something you settle for because you don’t have a strategy. Even having a basic game plan laid out is important as you can layer-in room for the unexpected. Will you have six grandkids instead of two? Will you live to 105? One never knows such things so it’s important to talk to someone who has walked many of these unexpected paths with their clients before you.

As I wrote in the very first article, there are five primary planning areas: tax planning, healthcare/insurance planning, estate/legacy planning, investment planning and income planning. To ignore or fail to coordinate these five key areas is to take a chance with your future. Sure, there are no guarantees and you should run away from anyone who tells you there are, but it is guaranteed that if you fail to plan, you are really planning to fail.

We would love to help you make the unexpected not quite so, well, unexpected. So visit our website, give us a call or attend one of our live events. Better yet, come in for a visit. We’d love to make a new friend. After all, not having a strategy is really not a strategy at all.

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The Next Step?

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