By Randy Locklier, President, Gulf Financial
Should Annuities be a part of your retirement plan? There is a lot of misinformation out there, so I thought I would set the record straight and explain how they work and the place they have in retirement planning. Let’s start first with the 4 kinds of annuities you could buy.
Fixed Annuities. These are the simplest and have a fixed rate of return like a CD. They are not FDIC-insured, but still backed by the Financial Strength of the Issuer. Often called insurance CDs or more correctly MYGAs which stands for Multi Year Guaranteed Annuity. We find that rates on these products are 20-30% higher than CD rates and utilize a lot of Two and Three Year MYGA’s for our clients. Like most annuities, penalties apply for cashing out early, although interest can be withdrawn.
Variable Annuities. In this type of annuity, your money is actually invested in the market through a separate account. That means your actual value could fluctuate and you could lose money if the markets are down. Although they come with death benefits and income features, fees can be very high and the assets will be at risk. For this reason, we do not recommend or sell variable annuities at Gulf Financial.
Immediate Annuity. This product often gives the highest monthly payout for income that can start right away. In most cases with an Immediate-style annuity the income stops once the annuitant dies and there is no death benefit. Most of our clients desire a death benefit and for this reason, we do not utilize immediate annuities here at Gulf Financial.
Fixed Index Annuities. In today’s annuity market, there is a HYBRID annuity available which offers zero principal risk (based on the paying ability of the insurer). We can utilize many different indexes and participate in the market returns of these indices without principal risk. Sometimes, this can lead to higher returns over the long run than fixed strategies. In addition, these products are widely used for Permanent Income, and can be purchased with an Income Rider that will provide for permanent payouts to you, or you and your spouse for as long as you shall live. In most cases, these incomes double when the annuitant needs Long Term or Home Health Care.
Other important facts about Annuities
Almost all annuities have what is called a Surrender charge. That means if you exceed the free amount of withdrawal allowed (usually 10 % a year) you will incur a penalty to make the withdrawal. These penalties are large(10-15%) in the early years and decline to zero over the term of the contract.
Annuities are therefore NOT liquid. It is our opinion that clients should only put INCOME focused assets into annuities and that total annuities in any given portfolio not exceed 40% of assets, and, in most cases, even less. Many advisors that specialize in annuities (or sell only annuities) may recommend exceeding these limits against the best interest of the client.
Don’t expect market-like returns, or be fooled by something called the “Income” or “Benefit” Base with guaranteed rollups. This is not real money, but exists only to calculate the value of the monthly payment at some point in the future.
Annuity rates have been at a 20-year peak and are still at historically high levels. Our strongest advice would be to buy all fixed-income products (bonds, notes, annuities, CDs) while the rates are high. As THE FED begins to reduce the central rate all rates will follow. Expect to see low savings and CD rates in the near future, so act now. The chance will surely pass so take advantage of this opportunity now.
Annuity carriers are rated by their financial condition and we recommend only A or A- rated carriers.
If your broker is not discussing these topics with you and recommending shifting assets to take advantage of the trend You might just have the wrong advisor. Find out more about how we use a sophisticated mix of financial products to create the Gulf Financial Income Engine, generating reliable incomes in the 6-10% range for our clients and at a LOW risk profile. Find out more and visit gulffinancialgroup.com or call Rhonda at (833) 403-4041 to schedule your visit.
Good luck investors!! Be happy, be safe, and be blessed.
*Investments involve risk unless otherwise stated, and are not guaranteed.
