Annuities are one of the few financial products that allow financial advisors to use the word "guaranteed". There are many types of annuities, but in essence it's a contract between you and an insurance company whereby you hand them some capital, and they agree to protect your money by returning all of the capital at a later date, and or provide you a guaranteed income for life and or a guaranteed death benefit.

 Sounds like a good deal, right? The answer is that it really depends. 

First and foremost, the guarantees are based on the sole claims paying ability of the insurance company, so you better pick a strong firm with a solid credit rating. One should not put all of their assets into annuity products (33% of your total investable assets is usually sufficient), as they're generally rather illiquid products. It's important from a financial planning perspective that you maintain liquidity with a significant amount of your portfolio in the case of large unforeseen expenses.

 Secondly, if you look at the fees in annuity products, you will notice that they're usually higher than your typical diversified more liquid investment portfolio in ETFs, mutual funds, equities and bonds. Hence, it's important to measure the benefits being offered by the insurance company, and what fees you may pay for them. Do you really need all of the annuity features? If not, scale back and save some money.

 Annuities are not all bad. They do have their advantages, especially when the markets plummet or for that peace of mind 'safety feeling'. You may decide to cash in on that return of principal guarantee while everything else is in the gutter. Or, you could choose to start taking the income for life option, which is usually a percentage based on your age. For example Nationwide offer 5.25% for a 65 year old, but an even higher 6% for a 75 year old. The main advantage here is that the income benefit base locks in during a high point over the years that you owned the product, giving you significant market downside protection. 


One of the myths with annuities is that you don't get the money back once you have opened an account, or started taking income, or die. This truly is a myth, and it completely depends on the type of annuity (variable, fixed, deferred, immediate, index annuity etc..) in which you have invested. The right way to handle annuities is by using a professional financial advisor or wealth management firm who will give objective and accurate advice on what to do when considering annuities and which ones to use.

 Considering annuities? Get in touch with Hedges Wealth Management first. 

The information in this article is not intended as tax or legal advice, and it may not be relied on for the purpose of avoiding any federal tax penalties. You are encouraged to seek tax or legal advice from an independent professional advisor. The content is derived from sources believed to be accurate. Neither the information presented nor any opinion expressed constitutes a solicitation for the purchase or sale of any security. This material was written and prepared by Hedges Wealth Management LLC.

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