Philippians 4:6-7 (ESV)
“Do not be anxious about anything, but in everything by prayer and supplication with thanksgiving let your requests be made known to God. 7 And the peace of God, which surpasses all understanding, will guard your hearts and your minds in Christ Jesus.”
Don’t be anxious about ANYTHING. Worrywarts tend to make poor decisions. They don’t act when prudent decisions and action are needed or they act unwisely based on future worries. I believe many buy annuities based on fear and worry. They usually don’t know what they bought (I know this because I have helped friends with their investments) and they don’t know what they paid. They also don’t know what they are paying each year for the annuity.
Annuity, annuity, what art thou annuity?
A couple of years ago I met with a couple of different local providers of various annuity products. At that time, I knew nothing about annuities except that my mom had some and seemed to be delighted. Mom was not a worrywart, but my dad was. As it turns out, mom did have some decent annuities, but I am afraid that she paid more for them than they were worth. There are plenty of ways to learn about annuities. The best first step to learn isn’t by talking with someone who sells the annuity product. Before you do that, do some basic homework. Let me suggest some questions you need to answer to prepare yourself before you start down a path to “invest” in an annuity.
What is an annuity?
- An annuity is a contract. Don’t forget that. Read the fine print. You will have costs. Extras cost extra. Think about it this way. You buy a new car and sign a contract. Before you leave the dealer, someone will ask you if would like the extended warranty, undercoating and other special things. These all cost extra.
- Life insurance (term life is the only life insurance I would ever buy) is insurance that pays someone else if you die. An annuity is another type of insurance that pays you while you live.
- The annuity contract is sold by financial institutions, typically insurance companies and is designed to accept and potentially grow funds from an individual for future payouts. This makes it sound like an investment.
- Upon annuitization, the contract says the insurance company will pay out a stream of payments to the individual at a later point in time.
- It may pay out for a specific number of years or for the life of the buyer.
- The period of time when an annuity is being funded and before payouts begin is referred to as the accumulation phase.
- Once payments commence, the contract is in the annuitization phase.
- Annuities do not guarantee that you will have enough income in retirement any more than Social Security does. Read the promises with a skeptical eye. Don’t forget to think about inflation.
Here are some questions to ask and a little research preparation you can do before you purchase an annuity contract:
- What problem am I trying to solve? For example, are you concerned about having income for your entire life even after you cannot work to earn a living? What products help solve that problem? In other words, did you know that annuities are only one potential solution? Do some comparison shopping.
- Have I created a long-term written financial plan that guides my decision-making process? Your plan should include goals and how you plan to reach those goals.
- What are the potential costs and extra costs of an annuity? Suggestion: Google the following question and then read several answers: “What are annuity riders?” Are they like insurance?
- Have I already taken care of some other more primary needs or opportunities? For this one think Roth IRA, traditional IRA, term life insurance, a will and power of attorney documents.
- Can I get comparable results using something else with lower long-term costs? If you answer “no” to this question too quickly, you probably have not done your homework.
- Did I pray about this? Did I ask God for wisdom before heading down the path? Shouldn’t we start here?
- Did I talk to others who have alternative views? Seek advice from several sources.
Let’s face facts. The best way to enter into a contract is to count the costs and understand the benefits before you talk to a sales person. The sales person is trained to sell. You need to be a trained buyer.
The Difference Between Annuities and Life Insurance
“Both annuities and life insurance should be considered in your long-term financial plan. While both include death benefits, you buy life insurance in the event you die too soon and an annuity in case you live too long. In other words, life insurance provides economic protection to your loved ones if you die before your financial obligations to them are met, while annuities guard against outliving your assets.”
“Think long and hard before you’re sold a retirement annuity, it may not be right for you.” – Fisher Investments
“…Dave (Dave Ramsey) isn’t a fan of annuities, and there are plenty of reasons why. One of the main reasons is that annuities have significant expenses that reduce the growth of your investment. Annuities also have surrender charges on early withdrawals that can limit access to your money in the first few years after you buy the annuity.” – https://www.daveramsey.com/blog/retirement-crisis-annunities
“Insurance companies want you to believe that whatever your financial problem, whatever your worry, there is an annuity that can fix it, and that just isn’t true. They are good solutions for some financial problems, but horrible solutions for other problems. Most investors haven’t appropriately defined with their advisors what problem they are trying to solve, and therefore end up misallocating resources into an under-performing annuity and have been sold something without looking at the overall picture.” – Dave Anthony, November 2016, Investopedia