Buying An Annuity? Keep it Simple!

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Jim Lorenzen, CFP®, AIF®

6a017c332c5ecb970b0192ac05f306970d-320wiIt isn’t uncommon for people to buy things they don’t need; and when it comes to annuities, it’s often no different, and it doesn’t help when (sometimes) an agent adds bells and whistles, in the form of elaborate policy riders, that the client will never use!

Today, because many baby-boomers are concerned about a lifetime income they can’t outlive, annuity recommendations often include a guaranteed minimum withdrawal benefit (GMWB) rider.  The problem is that often it isn’t needed.  Worse, the cost of the rider reduces the earnings potential for wealth accumulation by eating away at the interest clients would otherwise earn.

Rich Lane and Jeff Affronti, in the October 2015 issue of National Underwriter, cited an example of a buyer who purchased an annuity with $1 million in premium who paid more than $160,000 for this type of rider – and it ended-up being a benefit the client wasn’t even going to use!   They pointed out that the example may be extreme; but, the point is no less valid:  It’s a waste of money if it isn’t used.

In today’s low interest rates, it may not be the best choice to add an income rider over selecting the appropriate rate of return.  The GMWB rider may sound great, but during the accumulation stage the focus should be on accumulation.

If income is needed down the road, a deferred annuity will allow the client to turn-on (annuitize) the income stream.  If they need income now, simply purchase a single premium immediate annuity (SPIA) that allows instant access to funds that can be used to supplement Social Security.  For a guaranteed income, it’s probably the highest payout for the money available today.

Deferred annuities have an income stream ‘built-in’ to the product – they all have a basic fundamental feature that allows the owner to elect an income stream on or before the maturity date – and it doesn’t cost a thing.

Something to bear in mind.   You might find our Income Annuity Primer helpful.

Jim

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Jim Lorenzen, CFP®, AIF®

Jim Lorenzen is a CERTIFIED FINANCIAL PLANNER® professional and An Accredited Investment Fiduciary® in his 21st year of private practice as Founding Principal of The Independent Financial Group, a fee-based registered investment advisor with clients located in New York, Florida, and California. He is also licensed for insurance as an independent agent under California license 0C00742.  IFG helps specializes in crafting wealth design strategies around life goals by using a proven planning process coupled with a cost-conscious objective and non-conflicted risk management philosophy.

Opinions expressed are those of the author.  The Independent Financial Group does not provide legal or tax advice and nothing contained herein should be construed as securities or investment advice, nor an opinion regarding the appropriateness of any investment to the individual reader. The general information provided should not be acted upon without obtaining specific legal, tax, and investment advice from an appropriate licensed professional.

Jim's picture
Jim Lorenzen is a CERTIFIED FINANCIAL PLANNER® professional and An Accredited Investment Fiduciary® in his 21st year of private practice as Founding Principal of The Independent Financial Group, a fee-based registered investment advisor with clients located in New York, Florida, and California. He is also licensed for insurance as an independent agent under California license 0C00742.

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