Is An Annuity Right for Me? Money Matters Granger Hughes with

Driven by a passion to educate, inform and prepare future retirees, Mr. Hughes works with his father to help provide educational opportunities for clients as well as others in the community. He feels a responsibility to help inform those who may otherwise not be aware of strategies, changes, and opportunities available to them when it comes to their financial well-being.

Alot of people ask this question, and as we approach retirement, we probably hear more and more about it. The biggest thing with any retirement tool is understanding if that tool is right for you. We’ve all heard the saying if all you have is a hammer, everything looks like a nail. As fiduciaries, this is something we avoid when working with clients, as annuities aren’t as bad as you have heard, and they aren’t the answer to all your financial problems, but they can be a valuable tool for a retiree.

Let’s look at some types of annuities. One of the most common that we use is called a fixed indexed annuity. This means it’s linked to an index such as the S & P, but the fixed component means that the principal (the portion you put in) is safe. Taking that into consideration, the next step is what am I trying to accomplish?

1). Do I want to protect a portion of my portfolio?

2). Do I need an income stream?

3). Is there a Long-Term Care need?

1). Annuities in today’s day and age can be structured based on the need for protection. For instance, let’s say you want to take some risk out of your portfolio by purchasing an annuity. There are annuities in this current environment that will actually give you a bonus when you purchase one! This is one of the benefits in a rising interest rate environment that is actually a benefit to those who don’t want to risk their money in the market and want to save in a safer environment. In addition, there are no fees with this strategy, and as mentioned before, you would be linked to the S & P, which means if the S & P does x percentage, you would receive a portion, but if the S & P loses money, your principal is still safe. One of the potential drawbacks is liquidity (access to your money). Typically, a lot of carriers will give you 7% to 10% a year penalty free. But if you wanted to take out all your money, you could face a penalty of 10% as well, so you need to make sure that the annuity is a piece of your overall portfolio and not your only option for withdrawals. Contracts also differ on length, though its common to see 7 to 12 years. Some misconceptions could be if I pass away, my beneficiary will have to pay penalties and that is not the case. The annuity would be liquid to them, though tax liability could potentially ensue, as will most accounts. In addition, a lot of annuities will allow a higher percentage of access should you need long term care or have a chronic or terminal illness. Once again, it’s important to know your options and find the annuity that suits your needs the best.

2). Another option is creating an income stream. Let’s say you have a portion of a 401k, for example $300k. The positive about this example is that you are basically going to have two accounts, a lifetime income (LTI) account and a life time income base. The income side will be credited with a bonus up front in a lot of cases. For this example, let’s use 20%. The income side has grown to $360k day one. In addition, every year that we wait to take that income, they would give us an additional 8%. After five years, your income account would be close to $530k. If you decided at that point that you wanted to activate the LTI, the payout would be based on a mortality table at that time. Meaning if you were 70, that percentage would be 6%. This would create $31k of annual income for the rest of your life. If you passed away, your spouse would have the option of taking a lump sum or continuing that stream of income. One common misconception is that if both spouses pass, the money is gone and that isn’t necessarily the case. As mentioned earlier, there are two accounts, the income account and the actual account value. Should both husband and wife pass away, whatever is left in the account value would be distributed to the beneficiaries you had selected.

3). The third option is creating some support for Long Term Care (LTC). This option will piggy back off of option 2. Let’s go back to the previous example and say we have created a stream of income annually of $31k. This strategy would actually double that income to $62K, should you need LTC. The key here is, are you able to perform the activities of daily living (ADL)? If you can’t perform two of the six, for example you can’t feed or bathe yourself, the LTC option would be eligible to be activated. All you would need is a doctor to sign off stating that you can’t perform two of the six ADLs. This can help provide some much-needed support, as the likelihood of us needing some form of LTC as we get older increases drastically. The positive aspect of this strategy is it is your money, and you can use it how you want to. You don’t have to go into a facility, you can make your home handicap accessible, hire a nurse etc., whereas a lot of traditional LTC policies only give you the option to use an actual facility.

The key is to look at what options and tools you have in retirement. An annuity can be a great tool and can be structured in different ways to meet your specific needs. They aren’t going to suit everyone’s needs and desires, but it is important to know what your options are entering into retirement and how each tool can help protect and preserve what you have made throughout your working years.