Annuities are unique in that they offer a wide range of benefits for those thinking about how to fund their retirement as well as protect their assets while leaving a legacy for their loved ones. However, annuities are not an investment; they may not be suitable for everyone.
Along with the benefits come certain restrictions or limitations that, if not fully understood, could work against an individual’s circumstances. But, for the right people, and when used in the proper financial context, annuities can be an unparalleled in their ability to help people reach their financial goals.
The features and characteristics that go into making annuities work the way they do are best understood when applying them to the financial needs and objectives of individuals who are better positioned to benefit by them. The following can provide you with a way to classify your client’s unique circumstances to determine if annuities might be suitable for them.
Suitable Candidates for Annuities
People who are risk averse
Some people prefer to put their money in vehicles that have little to no exposure to risk. People associate savings accounts, T-Bills and bank CDs with safety of principal. There are many different types of risk, which, if not accounted for in your clients’ savings or investment strategy, could have a detrimental effect on their long-term savings. However, as a long-term savings vehicle, annuities may provide many layers of protection for preserving your clients’ principal. In addition to principal guarantees offered in many annuities, they also include minimum rate guarantees to protect against steep declines in interest rates.
People who don’t like taxes
While nobody wants to pay taxes, for those individuals in the higher tax brackets, annuities offer the benefit of tax deferral on earnings that accumulate inside the contract. For someone in the 50-percent tax bracket (combined state and federal), that would mean that their earnings could grow 50 percent faster than in an equivalent taxable vehicle. They will, however, have to pay taxes on their earnings when they are withdrawn, but assuming they are in a lower combined tax bracket at retirement they will end up saving on the amount of taxes that would have otherwise been paid.
People who want a competitive edge
Even risk averse people like to get that extra edge of a half a percent or more interest credited to their accounts. The earnings on annuities tend to be higher than those available on equivalent savings vehicles. Additionally, many annuity contracts will pay a bonus rate on initial deposits that exceed a certain amount. And, for CD-type annuities, the rates go up even further when the deposits are committed to a minimum guarantee period (i.e., five to 10 years).