Determining the Best Annuity Product for You

In the wake of the recent financial crisis, retirement concerns are mounting for all generations. As people’s focus turn to shoring up their retirement future, all savings options are, once again, on the table, and the one option that is garnering the most attention, by savers of all ages, are annuities.  Anxious savers are discovering, or re-discovering, the advantages of annuities for savings flexibility, tax benefits, safety of principal, growth guarantees, and income guarantees.  To their chagrin, they are also discovering that the choice of annuity products is not that simple based purely on the number of different annuity products that have proliferated in the last decade.  As with any critical purchase, determining the best annuity product for you should come down to what’s most important to you.

Narrowing Your Choices

Getting past massive confusion of the myriad of annuity products on the market, the one thing the annuity providers have done right is to create an annuity product for just about everyone.  Those seeking absolute safety can select fixed annuities with guaranteed rates and safety of principal. Those who understand market risk and want to make their money work as hard as possible can allocate their funds among several different types of investment accounts within a variable annuity. And, for those who have a low tolerance for risk, but want to do better than low fixed yields, an indexed annuity is an ideal choice.  For those seeking the ultimate balance in risk and growth, the best solution may be some combination of the three.

Before you begin your search for the best annuity product, it is vitally important to spend the time to fully understand your situation and objectives.  All deferred annuity products offer tax deferral, guaranteed death benefits, guaranteed minimum growth (this may only be offered as an option in some variable annuities), and, ultimately guaranteed income.  Beyond that, the different products vary greatly in their savings options, withdrawal flexibility, expenses, and their level of safety.  The only way to quickly narrow down your choices is to conduct a thorough assessment of your needs, your concerns, your risk tolerance and your priorities.  While your particular situation will vary from the next person, this investment profile guide can give you an idea of how to go about narrowing your selection.

Investment Profiles

Zero risk tolerance:

If you can’t stomach the possibility of getting back one dime less of your principal, and you are willing to except lower returns on your investment, then a fixed annuity with guaranteed rates is your best bet.   Fixed annuities are considered to be among the safest of all savings vehicles, but it couldn’t hurt to look at products from only the strongest and most financially stable life insurance companies. Stick with an A+ rated company and you’ll have the ultimate peace-of-mind.

Moderate risk tolerance/Need for higher returns:

With the introduction of indexed annuities, life insurers have provided one of the best solutions for people who don’t mind some fluctuation in their account balance if it comes with the potential for higher returns.  Indexed annuities actually, go one step better by locking in your principal while applying rates that are tied to a stock market index. Because they cap the maximum rate you can earn, you won’t capture the total return of the index. But, you also won’t incur any losses in years when the index declines.  Essentially, index annuities are all gain with no pain.  You can expect moderately higher yields than those on fixed annuities. Again, the guarantees available in indexed annuities are as secure as the company that backs them – stay with highly rated insurance companies.

Moderate to high risk tolerance/Seeking high returns:

If you are a stock or mutual fund investor, and you understand the risk-reward equation, variable annuities can give you the same opportunity for growth with the added benefit of tax deferral. As with any mutual fund, performance varies from one annuity provider to the next as do the investment choices that are available.  Variable annuities offer the same opportunity for achieving portfolio diversification and balance among different asset classes for optimizing long term growth potential.

Some variable annuities also offer options (at an additional cost) that provide principal guarantees, minimum growth guarantees and even minimum income guarantees, any of which virtually eliminates the risk of investing in the markets. Expenses can be somewhat higher than other types of investments, as much as 2% annually over mutual funds depending on how many guarantee options you add, but, for many investors who suffered through two steep market declines within 10 years, the peace-of-mind could be priceless.

Investment flexibility:

The one certainty in life is change. Through time, needs change, risk tolerance changes, priorities change.  While annuities are long term investments, they do offer some flexibility.  All annuities offer investors the opportunity to access their funds through withdrawal provisions. If the annuity is held long enough, this can be done without incurring any charges (not including a possible IRS penalty of 10% for withdrawal prior to 59 ½). In the early years of the contract, a fee may be applied if the withdrawal exceeds 10% of the account balance during the surrender period which can last as many as 10 to 12 years.

The highest level of flexibility can be achieved by taking a portfolio approach to annuity selection. By combining annuities with different investment characteristics, you can more achieve a closer match to your investment profile. A combination of fixed, indexed and variable annuities can be arranged to match your risk tolerance while optimizing your opportunities for growth.  The only way to truly counter all of the risks, including market risk, inflation risk, and interest rate risk, is to achieve optimal diversification and balance with all of your assets.