3 Mistakes Made with Annuities
Posted on March 26, 2014
According to a panel of experts at a MarketWatch Retirement Adviser event in New York, you may be making some key mistakes when you are evaluating annuities that you don’t even realize.
Mistake #1: Comparisons that don’t add up
One mistake is to assess the value of a variable deferred annuity as though all of its costs are pure overhead. That can lead to viewing annuities as unreasonably expensive. Rather, those costs are charges for the transfer of risk.
Any insurance product out there on average will not pay off. If buyers of any insurance product profit from purchasing it, the insurance company goes broke.
Investors often think of annuities as investment products, but that’s the wrong way to view them. When you compare a non-qualified mutual fund that has no such insurance benefits with a deferred variable annuity that does, it will seem more expensive.
Mistake #2: Focus on returns
Another mistake people make when they are evaluating annuities is allowing prevailing interest rates to be deal-breakers. Yes, lower interest rates can mean a lower payout, but that’s the wrong way to approach annuities.
The reason to buy an annuity is because you want the insurance of having that money in your checking account each and every month.
Annuities aren’t about internal rate of return. They’re about the absolute assurance of an income that outlives you.
Low interest rates won’t affect the payout of an annuity when someone is 85 years old, because all that matters is life expectancy at that point.
For someone about to retire, if you don’t like the current annuitization rates, delay your retirement for Social Security. That is a phenomenal payout. Those who delay their full retirement to age 70 enjoy what amounts to an 8% guaranteed rate of return each year, increased for inflation.
Mistake #3: Failure to Create Guaranteed Income
A big mistake that is made is in failing to annuitize assets creating a guaranteed stream of retirement income.
Annuitization of part of a portfolio can significantly reduce the failure rate of that portfolio to produce required income over a number of years.
People often have a perception that it’s easy to create significant income for a long period of time. If you only look at historical data you get a very negative perspective on annuities, which in turn makes you think you don’t need them. The last decade has shown us, that it’s tough to take money from a portfolio and have that portfolio survive for a long time.
If you are interested in finding out more about previously owned annuities and whether they are a good option for you please don’t hesitate to contact me.
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