Let’s face it: Annuities have an image problem.
People talk about “good” vs. “bad” annuities. They read marketing materials from financial advisors who “hate” annuities. And some of the problem is with the industry itself. It hasn’t done a good job of explaining how annuities can supply guaranteed income for life.
There is no denying, though, that income annuities are the only commercially available financial product that can provide pension-like income throughout your retirement.
Some annuities are ripe for criticism
Let’s acknowledge that there are annuities that have complex provisions, high fees and are sold by aggressive sales people. Despite these negative factors, they should be judged on their merits. And here’s where members of the industry (including the regulators) fail the customer. They just haven’t figured out a way to clearly disclose how they work and how they don’t work for everyone. Those annuities, while popular with some consumers, do not represent the entire category.
What’s in a name?
Using “good” and “bad” to distinguish between different types of annuities doesn’t make a lot of sense. Is life insurance good because it protects widows and orphans and travel insurance bad because it’s marketed aggressively in travel sites? No, they are totally different products that share the same last name.
The same is true for annuities except that most pundits and marketers only use the last name to define the category. I’d like to change that practice.
Rather than use the legal name that appears on the annuity contract one receives (often made up of four or five words), let’s start with just two categories — “income annuities” and “savings annuities.”
Income annuities, in turn, can be variable, immediate or deferred, but they share specific qualities:
- You will never outlive the payments if you elect lifetime income annuities. And you can select the date income will start.
- Since these income annuity contracts are pooled among different buyers, payments are determined by the company reflecting credit not only for interest but also for survivorship.
- You can customize your income annuity payout to last a specific number of years, continue for the life of a spouse or have the amount of the original investment, less payments received, go to children or other beneficiaries.
- Income annuities receive certain special tax benefits. If purchased out of a Rollover IRA on a deferred basis, there are no required IRA distributions until income starts. If you purchase it with personal savings instead, a portion of each payment is received tax-free.
Educate yourself to determine “good” vs. “bad”
To differentiate them from income annuities, I’ve called the other category of annuities “savings annuities.” Once people understand the good qualities of income annuities, they can separate them from the so-called “bad” savings annuities.
Income annuities alone won’t make your retirement plan, but they can make it better. You owe it to yourself, and those who may be depending upon you, to seriously consider them.
(Next week, I will share thoughts from some thought leaders who endorse income annuities.)
If you have questions about annuities and how they might help meet your retirement objectives, write to me at Ask Jerry.
Or if you’d prefer to do more research on your own, take a look at the useful tools and information we offer in our Current Income Learning Center at Go2Income.com.