In its classic use, an annuity is an exchange of investor capital for a stream of income.
The income is often guaranteed to the life of the annuitant and usually a surviving spouse.
Under this definition, an annuity feels to a retiree like a pension. Retirees love pensions. These same people avoid annuities, mostly because they have heard that using an annuity is not appropriate for anyone.
This is explained by being told that annuities are costly and generate a high commission to the selling agent.
At Cornerstone, we find that annuities are very appropriate for less than 20% of our clients, representing less than 30% of the assets under our care.
In these cases, annuities have reduced capital gains taxes while our clients are working, offer guaranteed income through retirement, and have saved millions of dollars in ordinary taxes when used in defined benefit plans.
Yes, millions of dollars.
By contrast, if an annuity were not used as a part of the investment and tax strategy, these clients’ retirement picture would be less certain. By this standard, annuities are misunderstood and underused.
For the other 80% of our clients, the use of annuities is unnecessary. In many of these cases, there is no need to explore.
Are Annuities Right for You?
The question that matters to you remains:
Will an annuity strengthen your financial position?
We will be able to give you a clear answer when we better understand your financial condition.
But here is one certainty: If your friend, colleague, or financial advisors argues against annuities without knowing about the details of your financial situation (risk-reward, liquidity, income, tax bracket, etc.), you will not have the advantaged of an unbiased opinion. Friends, colleagues and many advisors are well intended. But they don’t have the credentials and experience to provide you with a balanced assessment.
Where did annuities get the reputation of being a bad idea?
Like many industries, financial services have a share of opportunistic or narrowly or poorly trained people. Indeed, there are annuity products that we don’t recommend that offer a higher payout to the sales agent. This does not help the annuity industry or retirees.
For the record, Cornerstone gets paid the same rate for annuities as we do for fee-only investment accounts we recommend.
In summary, annuities are a terrific strategy for some retirement and income plans. For most retirees, not so much.
At Cornerstone, you will have the advantage of a balanced assessment on this often maligned, oversold, misunderstood, and sometimes underused product.
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