Annuities can fit into a financial plan, most often to generate income that one can't outlive, but they are not appropriate for all investors. While annuities can generate high withdrawal rates, it often accompanies a loss of liquidity. A client can generate high income but will damage that income stream if he or she accesses the principal. Monthly income is great, but there are expenses, emergencies or opportunities that often come up that need access to lump-sums beyond the monthly guarantees. While the fees can add up in annuity contracts, we encourage clients to think of them more as a premium paid to protect the stream of income, rather that just a "fee". The costs paid provide a benefit, it is up to the individual to judge whether that benefit is worth it. The way the guarantees are structured as liabilities of the insurance company issuing the annuities creates a situation where the investments inside the annuities are often more balanced and conservative than an individual may want. There is risk to the annuity companies paying benefits when the account values has dropped significantly, so the more conservative investments will often not keep up with market or sector boom cycles. Pedro M. Silva Principal Partner | apexinvest.org Office: 774.351.0805 | Cell: 978.994.0021 Toll Free: 800.634.1965 psilva@apexinvest.org 145 Main St. Hudson, MA 01749
Full disclosure, I do offer annuities for clients that would like some level of protection but I'll say the concern I have about annuities is the fact that some advisors will not offer the very best annuities that are available and that clients will purchase an annuity that is not very good which to me is more about the advisors lack of expanding their offerings or just being lazy. RILA's are very popular right now because of no fees or expenses but some have much lower cap rates or participation rates than others which could hurt the client's overall return. Jeff Kropp, AIF
The biggest downside with annuities that I see is the fee structure: one can decrease their returns without knowing—or wanting—to because of paid fees - many people don't even know they are paying them or what's included, such as management fees, rider fees and surrender charges up to 10 years. From a retirement planning standpoint, annuities often perform worse than diversified investment portfolios while tying up your money at a time when you may need flexibility for unanticipated expenses or better opportunities. And, as I often recommend to my clients, think about putting money in tax-advantaged accounts like 401(k)s or individual retirement accounts where they get better growth potential and liquidity — minus the punishing surrender penalties that make annuities so encumbering — for low-cost index or target-date funds.
Managing a property-based company is what taught me that sustainable wealth relies on strict financial structuring and finding the correct high-growth fields. In my practice at Zanda Wealth, I implement them both in refinancing and investment loans in order to enable clients to build their equity more quickly and maintain their portfolios more strongly. Cons of Fixed Income Contracts. Tying up your own capital in such contracts has a habit of posing a gigantic obstacle to individual cash flow. The most significant change that I have observed is that clients who forego them in favor of flexible property loans witness the difference instantly. The majority of suppliers charge you with stiff penalties in case you attempt to withdraw money within the first ten years. According to my experience in the discipline, these charges devour your principal and destroy your liquidity. More than that, the internal costs are usually kept secret from the common customer. You may be paying for insurance riders that are not in accordance with what you actually need. This is why this pulls down the net payout and results in less than a basic index fund. Your purchasing power reduces because the annual income is normally predetermined at a fixed rate. True wealth does not depend on the pledge of a frozen check, but on the freedom to move your money.