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Why are annuities so difficult?

First, why did I write this? In the first half of 2023, total annuity sales jumped 28% to $182.7 billion. This marks the highest sales ever recorded in the first six months of a year. I believe they are being purchased by people who are afraid of our current economic environment. I also believe they are being "sold" these products by professional salespersons who have a direct conflict of interest with the people they act like they are helping. Case in point that the Fixed-Index Annuities (FIA) sales are up 35% possibly because they have some of the highest commissions.

Annuities are highly complicated financial products that provide a stream of regular payments over a specified period, often used for retirement income or long-term financial planning. There are several types of annuities available, each with its own features and benefits. Here are some common types of annuities:

Fixed Annuities: Fixed annuities offer a guaranteed interest rate for a specific period, providing a predictable and stable income stream. They are considered low-risk and can be suitable for individuals who want to ensure a consistent income in retirement.

  1. Variable Annuities: Variable annuities allow individuals to invest in a selection of underlying investment funds, such as stocks, bonds, and money market instruments. The annuity's value and payout are tied to the performance of these investments. Variable annuities offer the potential for higher returns but come with greater investment risk and usually high fees.

  2. Indexed Annuities: Indexed annuities offer returns based on the performance of a specific market index, such as the S&P 500. They typically come with a minimum guaranteed interest rate, providing a level of downside protection while also allowing for potential growth linked to market performance. Money invested in this type of annuity may not be available for other potential investments that could provide higher returns or greater flexibility. This type of annuity usually has a high opportunity cost.

  3. Immediate Annuities: With immediate annuities, you make a lump-sum payment to an insurance company, and in return, you receive regular income payments that start immediately, often within a month. This type of annuity is useful for those who want to convert a lump sum of money into a guaranteed income stream right away. Consider this a type of pension plan.

  4. Deferred Annuities: Deferred annuities allow you to invest money over time, and the payouts begin at a future date. This can be useful for retirement planning, as you can accumulate funds within the annuity and then start receiving income when you retire. Annuity distributions can have tax implications, depending on whether they are funded with pre-tax or after-tax dollars. Withdrawals from tax-deferred annuities may be subject to ordinary income tax rates, and early withdrawals before age 59½ may incur additional penalties.

  5. Lifetime Annuities: Lifetime annuities provide income for the rest of your life, regardless of how long you live. They offer longevity protection, ensuring that you won't outlive your income. This type of annuity is often used for retirement cash flow planning.

  6. Fixed-Index Annuities: These annuities combine features of both fixed and indexed annuities. They offer a guaranteed minimum interest rate along with the potential for higher returns based on the performance of a market index. These are extremely complicated products and often have the highest commission payouts.

  7. Guaranteed Annuities: These annuities come with various guarantees, such as minimum income payouts or minimum accumulation values. They provide a level of financial security and predictability.

  8. Joint and Survivor Annuities: These annuities provide income to two individuals, typically spouses, and continue to pay out as long as one of them is alive. This ensures ongoing financial support for the surviving spouse.

  9. Longevity Annuities (Deferred Income Annuities): These annuities are designed to start payouts at a later age, often around 80 or 85. They are used to address concerns about outliving savings and provide a source of income in advanced old age. The risk is obvious here, it is a mortality risk that you may not live long enough to take advantage of the benefit.

It's important to carefully consider your financial goals, risk tolerance, and individual circumstances before purchasing an annuity. Annuities can be complex financial products, so seeking guidance from a qualified financial advisor is recommended to ensure that you choose the right type of annuity for your needs. I am only discussing the “types” of annuities and not even getting into the distribution strategies, Cost, lack of liquidity,

There are other variations of annuities that provide specific benefits and features to suit different financial goals and risk preferences. As with other types of annuities, it's important to thoroughly understand the terms, features, and potential risks associated with these products before making a decision. Seeking advice can help you determine if these types of annuities align with your retirement and financial planning needs.

Lastly, consider the risk associated with purchasing an annuity. Those risks can include inflation risk, risk of tax rates at withdrawal, investment risk, credit risk, and opportunity cost compared to other potential investments that could provide higher returns and greater flexibility.

Be careful when purchasing an annuity, it can be sold to by a professional salesperson who may have a conflict of interest with a pending commission or you can decide that an annuity is right for you based on other factors. Many companies are offering annuities without commissions now. These lower commissions may offer benefits to the consumer with lower fees, better payouts, or both.

Photo by Arturo Añez:

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