As a mix of part-time financial counselor and part-time retiree – and certainly more retiree than counselor – I’ve had to go through all the necessary steps to ensure my spouse and I have the funds needed to retire comfortably. I found this to be no easy task and if you’re like me, you’ll find yourself second-guessing your actions quite often in the retirement planning stages and thereafter. After all, ensuring the investment tools, funds and systems are in place to carry a married couple for 30 years in retirement is a complex and somewhat risky proposition. In the end, one can never be absolutely sure that all systems are go and running smoothly for an extended retirement.

One of the key financial tools I’ve wrestled with in planning for retirement is annuities. The concept is fairly simple.   You give up a lump sum of money to an insurance company that can be annuitized either immediately or at some later point in life, depending on the terms of the annuity contract and when you need the money. There are several variations of annuity products. I wrestled with whether I should buy an annuity a few years ago, not too long after we experienced the “Great Recession”, and I did eventually purchase a deferred variable annuity through a major life insurance company. At the time, I questioned my decision, but ultimately concluded that on a whole, it worked for me.

However, since then, I’ve continued to struggle with my decision to purchase an annuity. I suppose if the markets had continued to be poor following the recession I would have thanked my lucky stars and patted myself on the back for making such a smart decision. But the fact is the markets have trended up since the 2008-2009 recession so the money I invested in my annuity might have been worth more today if I had invested it in the market. Of course, I accept the market upside-downside risk, and at the time the annuity gave me peace of mind. For someone as close as I was to retirement in the tough 2008-2009 environment, it felt like the most comfortable choice.

For those who are considering purchasing an annuity, I share some hindsights that my purchase has provided:

Annuities are complex. 
One of major negatives associated with annuities is that they are often complicated products and difficult to explain to prospective buyers. In fact, I think it’s almost impossible for the average guy on the street to fully grasp the complexities of annuities and, frankly, I think many financial pros who sell them often have difficulty with the detail. I know I did.

Annuities can be expensive. 
My annuity continues to be more expensive than I initially thought. You can buy annuity riders (guaranteed income rider, death benefit rider, etc.) and absorb other fees (mortality and expense fees, fund fees) that can eat up as much as 4% or more of the return you’ll get by investing in an annuity. At the time I bought my annuity, I thought I needed the Cadillac product offered by my insurance provider and accepted riders and fees that have eaten up a good deal of the return from my deferred income annuity investment. Comparing the return I’ve experienced through my variable annuity to the return I could have gotten outside of my annuity is a little disheartening.

Annuities have “surrender fees”. 
A surrender fee is the insurance company’s right to charge the annuitant a steep fee for walking away from the annuity contract before the end of the surrender period. My surrender period is four years, but many surrender periods are even longer. Having to surrender thousands of dollars for walking away from an annuity can certainly keep one locked into a product that you may no longer want. Will I walk away from my annuity? Certainly not before my surrender period ends and I am exempt from occurring an additional fee.

Once annuities annuitize, the insurance company controls your money. 
My annuitized money will turn into a monthly stream of income for the rest of my life, which is nice, but the insurance company now controls this money and I can no longer get my hands on the lump sum I invested. It should be noted that there are some death benefit riders that will allow you to pass the annuity or the lump sum remaining on to your survivors, but at a price, of course.

Annuities are a transfer of risk investments with the insurance company. 
They are not growth investments and they should not be viewed as such. Costs and investment limitations play too big a role in annuities to expect anything other than so-so returns. On the other hand, lowered risk through an annuity purchase can leave one sleeping much better at night; knowing that there is safety in at least part of your retirement portfolio. Surely, many have found this to be true as annuity sales have been steady, if not spectacular, over the past several years.

Financial expert, Ken Fisher, CEO of Fisher Investments, says, “I hate annuities and you should too”. See his videoexplaining why he feels this way, or get his annuity insights publication. You’ll note that much of his problem with annuities focuses on the costs associated with annuities that diminish the return on investment.

On the contrary, I occasionally consult with a financial planner about the concern I have with my annuity purchase. She noted that “in a continually rising market; these (annuity products) are not that attractive. If you think the market will always do nothing but rise, then you would not need the income guarantees (that annuities provide). If I was certain my house would never burn down, I would not need homeowners insurance. But I am not willing to take that risk and it gives me and my family greater comfort knowing it exists.”

Do I regret my decision? I don’t know the answer. Prepping for retirement is not an easy task, and you’ll often find yourself second guessing your decisions. However, I do know that if you are considering an annuity, the purchase should be coordinated and balanced with other investments in your retirement portfolio. Some, like Ken Fisher, would say any annuity in a portfolio is a mistake, period. I agree that certainly too much of an annuity in a portfolio is not a good thing, but if you are risk averse, an annuity that makes up a small portion of your portfolio may be a good way to build balance and peace of mind.

Will I keep my annuity? I still don’t know, but I’ll likely make a decision for the long-term in the next six months. Maybe I’ll provide an update at that time.

Guest Contributor, Wayne Hanson, AFC®, Financial Wellness Services, LLC

December 23, 2014

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