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Annuities – When, How, and Why


It seems that nearly every fiduciary, fee-only financial planner has the same reaction when the subject of annuities arises; “I hate annuities.” While that is not acceptable, many clients will agree with them. As with most generalizations, hating a concept, such as annuities, does not constitute a true analysis of annuities or the client’s individual situation. Understanding the reasons requires a definition of the term annuity.

What annuities are is easily understood; they are transfer of risk products that supply income streams for people who need them. The income can last for life, or for a guaranteed period of time. For that purpose, they are invaluable to those who need them. Nothing else works like an annuity.

What annuities aren’t is more complicated; they are not investments, though they can be financially rewarding. Salespeople who claim that annuities are investments are misleading the public. Similarly, the home you bought to live in is not an investment, per se, but may well turn out to be financially rewarding. Not all financially rewarding purchases are investments.

Today we look at the decision-making process involving consideration of an annuity purchase.

  • Step 1 is “WHEN.” By far the most common use for annuities is WHEN retirement or other events permanently curtail your stream of income. The product of choice in this circumstance is called a Single Premium Immediate Annuity, or SPIA. With a SPIA, you pay a predetermined amount of cash to an insurance company, and that company immediately begins to pay you a monthly benefit that has been determined in advance by length of guaranteed payments, prevailing interest rates, and your demographic characteristics.
  • Step 2 is “HOW.” No longer do annuities have to be purchased from captive agents who represent only one insurance company. As with all capitalistic endeavors, competition can result in the best purchase being selected by the consumer. Today, annuities can be purchased through websites, independent brokers, and large custodians such as Schwab, TD Ameritrade (now part of Schwab), Vanguard, Fidelity, etc.
  • Step 3 is “WHY.”  The amount and nature of assets available to a person approaching retirement is as varied as our population. Desired lifestyle in retirement is just as diverse, and the result is a complicated retirement planning process. Some people already have sufficient lifetime income and/or assets to preclude any additional income needs. Others will fall short of the income goals.

In certain situations where existing assets and cash flows are insufficient for retirement, annuities can help satisfy the goal of income for life. This may be the opportune time to advocate for independent financial advice from a fee-only fiduciary. Annuities can be part of a comprehensive personal financial plan. Actually, most Americans already have an excellent annuity; Social Security. WHY someone might need another annuity is simply to solve his or her (or their) problem of providing sufficient lifetime income.

Rather than falling for a sales pitch in a fancy restaurant, it is smarter to seek comprehensive advice from a qualified CF®.

Van Wie Financial is fee-only. For a reason.