Steve Kerby

Oregon Financial Group

Your Questions on Annuities Answered

Q: I'm approaching retirement. What are annuities, and are they a good idea?

A:  Annuities are contracts with insurance companies. But, you give the insurance company a lump sum (or multiple payments), and, in return, they promise a stream of income payments in the future. It's a way to secure a guaranteed retirement income that you likely won't outlive. Several types of annuities exist, and even more variations exist within those types. Today, we'll focus on fixed and fixed-indexed annuities.

Q: Okay, what's a fixed annuity?

A: A fixed annuity delivers a guaranteed interest rate over the contract's life. Your income stream remains consistent and unaffected by market fluctuations. This predictability makes fixed annuities appealing to those seeking security in their retirement plan.

Q: And a fixed indexed annuity?

A: A fixed indexed annuity (FIA) also offers principal protection—your initial investment won't lose value due to market downturns. Where it differs is the interest earned. An FIA's interest rate is linked to a market index, like the S&P 500. If the index performs well, you could capture some of that growth. This provides an opportunity for potentially higher returns than a traditional fixed annuity, but with that, some additional limitations come into play.

Q: Limitations? Can you elaborate?

A: Yes. FIAs often have a "cap rate" or "participation rate." A cap rate limits the maximum interest you can earn, even if the linked index soars. A participation rate determines what percentage of the index's gain your annuity will capture.

FIAs, additionally, might have longer surrender periods (the time you need to wait before withdrawing your money without penalty) than fixed annuities.

Q: Annuities sound complicated. Are there any downsides?

A: Yes, annuities can be complex depending on the features they include. Here are some potential downsides to consider, along with ways to mitigate them:

  • Fees and Expenses: Annuities can have charges like surrender fees and administrative costs that eat into your returns. Counter: Comparing options and working with a financial advisor can help minimize fees and identify the most cost-effective annuities for your needs.
  • Lack of Liquidity: Annuities often involve surrender periods, potentially restricting access to your money. Counter: There are annuities with shorter surrender periods or those offering limited penalty-free withdrawals for more flexibility.
  • Loss of Control: Once you purchase an annuity, you relinquish some control to the insurance company. Counter: Explore annuities with various rider options. These can allow customization so the annuity better matches your requirements.

Q: Bottom line – are fixed or fixed indexed annuities right for me?

A:  That depends heavily on your situation:

  • Risk tolerance: If you're highly risk-averse and want guaranteed income, both fixed and FIAs provide principal protection. FIAs give you the potential for some growth but also come with added complexity.
  • Income needs: Annuities could be a good fit if you need a reliable income stream to cover essential expenses.
  • Financial goals: Annuities make sense if your objective is lifetime income. If flexibility and immediate returns are top priorities, other investment options might be better.

Crucial Note: Always consult a trusted financial advisor before purchasing an annuity. They can help you determine if an annuity makes sense for your retirement plan and guide you toward the most suitable type and features based on your needs.

Many people have learned about the power of using the Safe Money approach to reduce volatility. Our Safe Money Guide is in its 20th edition and is available for free.  

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Steve Kerby picture

Steve Kerby

Oregon Financial Group

5555 SW 196th Ave.

Aloha, Oregon 97078

(503) 936-3535

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