How to Think About Annuities

A quick Google search of “Annuity Strategy” will yield almost 1 million results. It is not difficult to find someone to dole out annuity advice. The first thing anyone shopping for annuities should know is that an annuity is an insurance product. People don’t think that they will become extremely wealthy off of their home insurance or auto insurance. The same is true for annuities. Regardless of what type of annuity a person chooses and the riders on it, the concept is the same. An annuity is designed to PROTECT money.

What is the Point?

Why would a company sell an annuity? A company sells an annuity because they believe that they can earn more money on the money than they will pay out to the customer. Show me an annuity that doesn’t accomplish this and I will show you a company that won’t be around for long. This is not to say that annuities are all bad, in fact, I believe annuities make a lot of sense in the right situation.

One thing I always tell my clients is that “Annuities are great if you play by the rules.” Annuities can accomplish anything from guaranteed growth, guaranteed income, or a combination of the two. The problem is that many of the benefits that come with annuities also come with costs such as long lock-up periods or high internal expenses. If a person purchases an annuity for one reason such as guaranteed income and ends up cashing it out, it can cost the owner a great deal.

Where PLanning and Insurance Converge

I believe an annuity should not be purchased without a strong financial plan because they can be so complicated. Often times I use an annuity to cover fixed expenses in retirement much like a pension replacement. As I alluded to in 5 reasons for financial planning in your 50s, many annuity riders have a growth stage before the income stage that can be as long as 10 years. Planning ahead of time and executing on that plan will help the owner get the most out of their annuity.

I can’t count the number of times I have talked to a client that has been sitting on an annuity for years and has forgotten what kind of annuity they purchased or why they purchased it. I guarantee the person that sold them the annuity made it sound like the best thing since sliced bread, and it may have well been a great product. The problem is that if someone purchases a product without a plan often times they cannot take full advantage of it.

The Bottom Line

An annuity is an insurance product. Insurance can be a good thing to have, but it needs to be used with a purpose. Create a plan and follow through with it to get the most out of an annuity.

Featured photo by GotCredit

About Justin Boucher

Since 2011 I have been working in the financial industry. I worked for three different financial advisory firms before going independent. In working for various firms I was able to pick and choose what I did and did not like about financial advisory practices and incorporate it into Justin Boucher Advisory Services. Coupling asset management with a dynamic financial plan is key to financial success. Nowadays it is common for entrepreneurs to be college dropouts, but I, in fact, did graduate from the University of Nevada with a BS in business administration. I enjoyed college so much I decided to go back to the University of Nevada and received my MBA with a focus in finance. I put together a 5-step process that helps professionals make sure they get where they want to go with their finances.