Compared to national averages, most people, Hou found, underestimate how long they will live. This can have enormous implications for retirement planning. Remember that complicated list of considerations you need to make when withdrawing from a defined contribution plan? Life expectancy is chief among the factors that determine how much you can safely withdraw.
Pension plans have largely withered away, but most workers can create their own pensions by choosing an annuity. Unfortunately, over the years, annuities have developed something of a bad reputation for high fees, overly complicated contracts and some sleazy sales tactics.
Annuities come in all shapes and sizes, and some, like a single premium immediate annuity SPIA or a deferred income annuity , can provide reliable, consistent monthly payments until your death, just like a pension.
In fact, a qualified longevity annuity contract QLAC is specifically designed to help you stretch k funds into guaranteed lifetime income payments. The U. These annuities are also more likely to charge high fees and structures confusing to the average consumer.
This annuity puzzle has now lasted well into the 21st century. This is an understandable, but unfortunate, phenomenon. When you buy an annuity, you hand over a very large chunk of change for the promise of checks in perpetuity. Depending on how your annuity contract is written, you also may forfeit your ability to pass on money to family, as in many cases the annuity company retains all unpaid funds when you die.
This is unlike with a k or IRA, which is readily inheritable. But lifetime payments are less about maximizing your gains than ensuring that you have money to spend if you live longer than you think you might. And depending on your situation, this certainty you gain may actually enable you to take on more risk in equities. He lives in Dripping Springs, TX with his wife and kids and welcomes bbq tips. Select Region. United States. A return of premium ROP feature ensures that you will never receive less than what you put into a fixed annuity product if you surrender the annuity.
You still have to follow any surrender schedule in your contract, but you will be able to exit the contract when allowed without a net loss.
Inflation erodes the value of any investment. The good news is that you can protect your annuity from inflation by purchasing an annuity that builds in this benefit or by purchasing an inflation protection or cost-of-living adjustment rider. Expect to pay extra or receive a lower payout in exchange for this benefit.
Annuities can be an excellent planning tool to reduce your risk of running out of money in retirement, but they do come with trade-offs, such as fees and reduced investment returns. Congressional Budget Office. Accessed July 6, Securities and Exchange Commission. Internal Revenue Service. July 6, Henssler Financial. Nationwide Mutual Insurance Company. AM Best. Trading Economics.
Stan the Annuity Man. Actively scan device characteristics for identification. Use precise geolocation data. Select personalised content. Create a personalised content profile. Measure ad performance.
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Measure content performance. Annuities are such terrible investments that the minute the government passed a law specifying that financial professionals had to act in their clients best interest, annuity sales fell off a cliff. In , new rules were passed by the Department of Labor that stated that brokers have to act as fiduciaries. Believe it or not, prior to the rule being passed, stock and insurance brokers could sell you anything they wanted — whether it was right for your or not.
So typically, they sold whatever paid the highest commissions. If these were such wonderful products, as defenders of annuities will maintain, why did so many people stop selling them — even before the law went into effect?
Fixed annuities prevent losses. You are typically guaranteed that the value of your principal will not go down regardless of what the stock or bond markets do. Again, you miss big "up" months, like recently. Long-term, these annuity returns often look like fat-fee Certificates of Deposit CDs. It becomes like an expensive restricted version of a CD. Ditching a CD is easy. Ditching a fixed annuity usually suffers stiff penalties and, potentially, a tax hit.
Whatever you need, annuities are probably wrong. Yes, my advice is conflicted — my firm often helps people exit deferred annuities. My opinion remains, regardless. Everyone deserves more transparent and flexible investments.
Ken Fisher is founder and executive chairman of Fisher Investments, author of 11 books, four of which were New York Times bestsellers, and is No.
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