What is the best annuity plan? This guide will compare the different annuities to understand better which annuity plan is best for your retirement.
For some reason, I feel like when someone mentions or discusses an annuity, but they’re not in the annuity world, all annuities are categorized as one thing.
Like when some “personal finance guru” refers to all annuities as an immediate annuity or SPIA. Never provide the entire picture.
“Don’t buy annuities….until you read this guide.”
How about “This type of annuity stinks. You shouldn’t buy this annuity.”“?
If you’re reading this, you probably are considering purchasing an annuity.
If you’re not, maybe consider learning just a little bit more about the annuity. It couldn’t hurt.
You’ve probably been told good things and bad things about a specific type of annuity.
Here’s the reality. Annuities aren’t for everyone.
To take it a step further, not 1 type of annuity is the best solution for every retiree.
I’ll briefly go over the various types of annuities and provide my professional opinion on which annuity best suits a specific type of profile.
|Benefits||Fixed Annuity||Fixed Index Annuity||Variable Annuity|
|Protection from market loss||Yes||Yes||No|
|Guaranteed lifetime income||Yes||Yes||Yes|
An immediate annuity or SPIA is an insurance product in which a consumer exchanges a lump sum of money for an immediate irrevocable income stream.
Focus on the key phrase “Irrevocable.” This means once you start it, there’s no turning back.
The tradeoff is you’ll generate a fixed income that, in most cases, will generate the highest immediate income payouts among annuities.
Who’s a good fit for a SPIA?
I’m not the biggest fan of SPIAs, but they do serve a purpose.
I’d have to say a consumer looking to retire on a fixed income, and ok giving up control of their money.
Maybe a retiree who doesn’t have the time to grow their assets and can’t afford a loss.
Layering an additional retirement income stream on top of social security to establish a foundation might be a good idea.
I’d definitely make sure there are enough liquid assets outside the annuity purchase in an emergency.
If you don’t like the idea of giving up control over your retirement savings, you could always use an income rider to generate your guaranteed lifetime income.
Deferred Income Annuity
A deferred income annuity is like a SPIA but defers the irrevocable income stream at least 12 months out.
The idea behind a DIA is to achieve an income stream in the future.
However, is it really a good option? I’m not sure.
Currently, DIAs and QLACs offer lower-income payments than an income rider, so I’m sticking with a “no.” However, this may change in the future.
Over the past 10 years, I’ve seen products evolve and improve.
From that standpoint, is future annuitization a good route to go?
Can we achieve a similar outcome with an income rider now and still maintain flexibility in case of a better product 5 or 10+ years down the road?
Who’s a good fit for a Deferred Income Annuity?
The DIA definitely serves a purpose which is that it’s built for a consumer seeking an income stream in the future, typically way in the future.
I definitely see value in deferring the RMD with a QLAC.
Simple to understand. It’s like a CD but tax-deferred.
You purchase an annuity with a guaranteed fixed rate.
When the contract is up, you move it somewhere else.
You either spend the interest, or you don’t.
Who’s a good fit for a Fixed Annuity or MYGA?
Someone super conservative that wants to buy a CD, but CD rates are too low.
Someone that wants to know today exactly what they’ll get in the future.
I think the older you get; the more conservative you need to get. So an MYGA might be a fit.
Fixed Indexed Annuity
A fixed index annuity is a tax-deferred insurance product that allows a consumer to participate indirectly in a portion of the upside from the market.
The insurance company won’t actually be investing your money in your index strategy but rather measuring the positive movement of the index between two specific dates. If there is positive movement, you earn interest.
Basically, you have the ability to earn an average (possibly slightly above average) rate of return in exchange for protection from the downside of the market.
You can’t lose money due to market volatility.
With that said, you can’t compete with the upside of a variable annuity.
Some say this is a weakness while others say it’s the best of both worlds, stock market performance with principal protection.
You also have the option to add an income rider to distribute a guaranteed retirement income stream.
You’ll also gain more flexibility with the income rider than a SPIA if you choose the income route.
Who’s a good fit for a Fixed Index Annuity?
A consumer wants a better opportunity at growth than a fixed annuity but doesn’t want the opportunity to lose money in the market like a variable annuity.
My opinion is anyone between ages 40 and 75 would be a solid demographic. Those between the ages of 40 and 50 could utilize the income to set themselves up for their future retirement income by knowing how to achieve their target retirement income goal.
Conservative to moderate behavior is a good profile for an index annuity.
A pre-retiree that’s looking to plan for a fixed retirement income for tomorrow would be a good fit.
A variable annuity is a tax-deferred annuity that allows you to participate in the true stock market.
The variable annuity is a security product, not an insurance product.
Basically, you’ll experience both the good and bad of the market.
All the upside and all the downside.
You’ll be able to purchase an income rider (Enhanced Guaranteed Withdrawal Benefit) to generate a guaranteed retirement income stream that you can’t outlive similar to a fixed index annuity.
Who is a good fit for a Variable Annuity?
I wrestle with this a lot. Someone buying a variable annuity is subject to losing their money and paying a ton of fees.
- If someone wanted all the upside potential with risk, wouldn’t they save money on fees by just investing their money in the market alone?
- What if the retiree wanted the lifetime income option? Is it worth the risk and fees when you could buy a better income rider with a fixed index annuity at a fraction of the cost and without the risk?
I guess a good fit would be an investor who has time and wants all the upside potential and risk?
I almost feel like variable annuities are more of a niche retirement plan but are sold in mass production. They definitely serve a purpose, but if it were me, I’d rather invest in the market outside of an annuity or purchase a fixed index annuity with an income rider without the risk and a higher income amount.
Over the years, I’ve discovered that the income rider on variable annuities is either used as a “safety net” in case of a volatile market or simply for income planning.
My opinion is if you’re purchasing a variable annuity with the intentions of simply retirement income planning, an index annuity in a lot of ways is a better option.
You might be disagreeing with me wholeheartedly right now. Call it a knee-jerk reaction, but hear me out.
If you’re seeking a retirement income within the first 5 years of the contract, it’ll be difficult for a consumer to maintain their values due to fees (3%-4% annually) and the income withdrawals coming out of the annuity same time.
At that point, an index annuity with an income rider might be a better option simply because the consumer will pay a fraction in fees (1% annually), the index annuity’s income rider could offer higher income payouts, and you’re locking in your gains on every reset period.
Just my opinion.
Long-Term Care Annuity
An LTC annuity is a tax-deferred traditional fixed annuity that provides an enhanced tax-free benefit to supplement the costs of Long Term Care.
That sounds confusing, right? Tax-deferred, but tax-free?
Basically, based on an underwriting process, this fixed annuity will either double or triple in value towards only a long-term care benefit, tax-free.
Once your LTC benefit is determined, the consumer will pick out their service or facility, pay for the cost upfront, send the receipts to the life insurance company, and receive a reimbursement for the cost.
The key to being tax-free is reimbursement.
Who is a good fit for a Long Term Care Annuity?
A consumer seeking or wants to plan for long-term care, a nursing home, home health care, or an assisted living facility.
Fixed Annuities are a good option if you don’t enjoy taking risks, and predictability is your friend.
Fixed Index Annuities are a good option if you’re ok with the potential to earn some of the upsides but hesitant with the possibility of losing money.
Variable annuities are a good option if you’re comfortable with risk and seeking the most growth potential possible.
That about sums up my thoughts about the various types of annuities.