05/29/2026
Friday Financial $$
The truth about Annuities (Pt 1)
In the next two editions, I will discuss an investment tool that is gaining popularity, but remains a mystery for many... ANNUITY !!!
I will utilize a Q & A format to cover topics such as, why they are so popular, the different types of Annuities, tax implications and the risks/advantages associated with these products.
I should make it clear, my goal in this writing is not to promote or discourage the purchase of Annuity products, but merely inform the reader.
Q: So what is an Annuity ?
A: An Annuity is an insurance product, sold as a long-term investment strategy, for a persons retirement years. Think of it this way... Life insurance (aka income protection) provides immediate income in the unfortunate event of a premature death, whereas an Annuity is designed to provide guaranteed, consistent income for life and protect someone from outliving their money.
Q: Why are they so popular with some investment advisors ?
A: Starting in the late 70's, traditional pension plans were on the fringe of their sunset. Over the next few decades, they were quickly being replaced by the introduction of 401k's, 403b's and Deferred Compensation (all of which are invested in the various indices, usually the S&P 500, and subject to the volatility of the markets. Unlike a Defined Benefit Plan (aka pension), where retirement income is guaranteed based on a formula considering years of service, the market based plans guarantee no such thing. Consider the fact that Americans are living longer today as opposed to 47 years ago.
Average Life Expectancy in 1980... Male = 70 years
Female = 77 years
Average Life Expectancy in 2026... Male = 76 years
Female = 81 years
So as you can see, the effect of Americans living longer, combined with a non-guaranteed income stream, creates a marketplace for these products.
Q: Are there different types of Annuities ?
A: Yes...Annuities can be broken down into 4 main categories. 1) Fixed - These products offer a guaranteed monthly payout with a set ROR (rate of return). In the world of Annuities, they are considered conservative where the priority is safety, as the insurer bears the risk of loss. 2) Variable - Unlike their fixed counterpart, Variable Annuities do not offer a guaranteed monthly payout. Both fixed and variable are invested in the markets. The difference being, with the Variable Annuity option is the client bears the risk of loss. For this reason, VA's are considered to be a more aggressive approach, seeking greater returns in hopes of a bullish market. 3) Immediate - Annuitization (payouts to the client) begins soon after premiums or a "lump sum" payment is implemented. Usually within the first year of the contracts inception. 4) Deferred - Annuitization begins at a future date, allowing for growth over time. Deferred Annuities maintain a sub-category known as a "Structured Annuity". Essentially adding "Buffers" to the contract, allowing for downside protection and balancing that with a an upside cap (aka participation rate).
Example: 12% Buffer
Market drops 8% = 0% loss
Market drops 15% = 3% loss (as opposed to the full 15%)
Market is up 10% = 10% ROI (return on investment)
Market is up 15% = 12% ROI (return on investment)
The goal in these products is to seek a balance between safety and growth. It is important to note that Buffered Annuities are securities products, registered with the SEC and tracks an index ex: S&P 500). They must be sold with a prospectus.
Q: How do I avoid purchasing a product that is not in line with my retirement goals & investment strategy ?
A: First, educate yourself !!! Research and bounce ideas off of people who have no stake in your outcome and seeking out those who have already done what it is you are considering. Secondly, when you make the decision to move forward, be sure that you work with a fiduciary (person who is legally bound to put your financial interests before their own).
Next month I will continue with part 2 of this series, where we will discuss tax implications and the risk/reward aspect of Annuities.
Be blessed !
"Walk with the wise and become wise".
- Proverbs 13:20
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