When it comes to investing in annuities, there is a lot to think about. What can you expect to get out? What ruses should you look out for? Would a bond be a better idea?
The good thing about a bond is that it does not have the rooted costs that annuities do. But that is no reason to choose a bond over an annuity. Bonds typically generate low returns unless they are long-term. It is the long-term bonds that are comparable to annuities. Keep in mind, however, that for this to be true, interest rates must remain steady. If interest rates rise, a larger portion of the bond will need to be sold to achieve the same income which means the bond will not last as long. Put simply: larger increases in interest rates results in shorter bond life. This is not good for a retiree depending on this income; the shorter the life of your bond, the higher chance you have of outliving it.
It is also important to take income taxes into consideration. Bonds are taxed as normal income whereas annuities are largely tax-free until you have reached your preliminary investment. There is, however, a scenario where there is no tax difference between annuities and bonds. This occurs when the funds allocated to acquire the annuity or bond are held in an IRA. In this case, each is taxed as ordinary income. Taxes also come into play upon selling a bond. If the bond is sold for more than its cost due to decreased interest rates, then it is taxed. Otherwise, the sale is tax-free. The assured income of an immediate annuity is, in general, more secure than what a bond can offer.
People are hesitant to invest in annuities for many reasons such as inflexibility, future possibility to earn higher yields, and sacrificing the opportunity to leave something behind for loved ones. But all of these can be deterred by not investing everything you have. Choose a reasonable amount; you do not have to go all in.
When purchasing an annuity, it is important to pay attention to what is guaranteed, not what could happen. In this case, optimism is not your best bet. It is important to be realistic. Look at what the contract says and listen to the contract, not the agent. The contract is where the truth lies. If the agent promises something you are uneasy about, have the agent personally sign off on it. Knowing the guarantees and policies involved can help you avoid disappointment in this largely unregulated industry.
The security of annuity only comes with looking at the fine print, doing the math and being smart about your investment. It is always best to do the math according to the worst case scenario. That way, there is only chance for good surprises. If the policy shows a contractual minimum, then that is your worst case scenario. You can explore different scenarios on your own by using the following formula:
One ruse to look out for is that of the upfront bonus. Everyone loves the word “free” especially when what’s being offered is money. Annuity agents capitalize on this greed by offering a bonus. This is not a reason to buy or switch annuity. Most bonuses are in conjunction with an annual fee for the life of the policy. Also, when transferring, the bonus might not even cancel out the cessation charges from your previous annuity.
Nobody can predict how interest rates will fluctuate, and nobody can protect you from risky investments if you have not done your homework. Read the fine print, plan for the worst, run your own calculations, and if you need help with your investment, get help.
Get Help with Annuities
Rice Law Group specializes in annuities along with every aspect of estate planning. Work with a New York estate planning attorney who specializes in helping individuals plan for the future. Call us at (212) 944-1180 or fill out our contact form online.
