July 2, 2010
Should I Have An Annuity In My Portfolio?
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Categories: Retirement, Investments, Financial Planning
Annuities have been around for a long time. Over the years different types of annuities have been created and used in replacement of there prior products. There are 3 types of annuities fixed, fixed equity indexed, and variable. A fixed annuity works like a long term CD. They generally guarantee rates for a 3-5 year period with a higher rate in the beginning years and a lower rate for the remaining years. They also generally have a 30 day period where you can remove your money after 5 years. If you don't remove the money you could risk having it locked up for another 3-5 year period. They generally have no or very low fees and are the most cut and dry version of an annuity. Variable annuities have received a lot of bad press. Some of it rightfully so. Variable annuities provide you with downside participation and allow you to participate in the upside of the market. However they tend to have very high fees and the timing of your initial investment is a major factor related to the success of the product. Variable annuities were very popular over the last 5-10 years but have recently lost a lot of market share to other annuity and insurance products.. Fixed equity indexed annuities are one of the types of investments that has taken market share form variable annuities. Fixed equity indexed annuities also provide you with 100% downside protection and allow you to participate partially in the upside of the market. There is generally no or very low fees for these annuities. The initial amount invested can not go down and the gain is generally tied to a mixture of fixed rates and specified index's performance like the S&P 500. These annuities have become very popular because of there ability to provide clients with good returns for a lower amount of risk as well as outpace inflation and provide guaranteed income for life. Annuities are one of the few products that offers a guarantee. You can invest retirement and non-retirement assets. They can guarantee you a return as well as income for the life of you and your spouse. When deciding on an annuity you should consider the following. The guarantees are only as good as the company that backs the annuity. I would recommend using a highly rated, large company that specializes in annuities and has a good history. You want to pay attention to the fees, surrender period (this is the period that if you remove all your money you will be charged a penalty), the rates of return, and the amount of withdrawals you can take at certain times. The annuity also needs to meet your risk tolerance and the goals and objectives you have. Annuities can be complicated products with a lot of fine print, however they can also be a very solid portion of your portfolio and a great source of guaranteed income during retirement. It is important that you understand the product before purchasing one. As always, you can reach me at
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