How to Choose the Best Annuity
This is always a tough issue to address because there is no objective definition for the best annuity. Last week one of my readers sent me the link for Barron’s Top 50 Annuities of 2018. The highly regarded financial publication puts a list out every year and Steve wanted to know my thoughts.
Barron’s list comes out in the summer every year and I chose not to link it because you can look it up easily enough if you’d like to see it. Objectively speaking it’s a good list of contracts but the limitation is the same as looking at an individual contract to see if it will work for you. There has to first be a plan before you find the annuity to do the job.
Some of you may get tired of me repeating myself but I need to remind you of the most important lesson I try to share with everyone. The point of using annuities is to protect assets and if you’re going to use an annuity then you have to use a strategy that helps you get the most out of it.
The Barron’s article is limited to showing variable annuities with the lowest fees or best performance and income annuities with the highest payout. All of those relate to getting the most out of an annuity but they are not necessarily relevant to all retirees because of certain drawbacks that may come with a specific contract.
I often recommend plans to people and an annuity that makes it work and don’t ever hear from the person again. A lot of times a person will respond to me asking if a different annuity would work better. So I am left to assume that many people think I’m not giving them the best option. There will always be an agent who believes to have a better annuity and consumers have a hard time deciding which way to go.
So for each type of contract available there is a two-pronged approach to finding which is best. First you need to focus on the specifics of the contract type to determine if it’s right for your situation and second you look at the objective components to find the contract that will deliver the best mix of cost and benefits. Here they are one at a time…
VAs were originally created as a means for high net-worth individuals to defer taxes on investment gains. If that is your purpose then you’ll want to follow Barron’s advice that defined the lowest management fees and highest recent performance figures. More often these days, however, variable annuities are used for guaranteed income and then getting the most out of it is a variable proposition, as the name suggests. Enhanced fees for such benefits cut long-term growth and legacy potential substantially. This option tends to be a matter for personal preference so if you want the upside of the market with the downside of an income guarantee you simply need manageable fees and a variety of investment options that provides plenty of opportunity.
This is really easy because it’s the simplest form of annuity – premium in exchange for lifetime income payments. So all you have to do is find the highest monthly payment from a company with financial strength that meets your ideal scenario. For true, hands-off security this can be set in place to provide the greatest form of stability. But maximizing income depends your age and underlying interest rates so getting the most for your money is a matter of timing and economics. These days the perfect fit is a unique situation so give alternate options some consideration in order to verify what you’re getting.
Interest rates, time frame and liquidity. Lock-up period corresponds with yield to indicate whether there’s an advantage over other safe money options. Liquidity will set this apart as a better option for many people with that being what really determines the best contract. Access to funds can be limited for greater yield and increased for less yield so there’s lots of gray area in the top few contracts. Read the fine print and make sure you’re not short on benefits just for a few more basis points.
Fixed Index Annuities:
With lots of ways to use these there are lots of variables to consider. If you are looking for guaranteed income then it’s just like an immediate annuity so choose the highest payout from the best company. The guarantee won’t be as much as you can get from an immediate but more than the minimum offered with a variable. Outside of that is where it gets tricky because of the sales pitch that comes with most contracts. New and improved products are not proven so projections can’t be trusted. At the bottom line you need to keep it simple. Use indices that have been around for a while so you’ll be working with more reasonable expectations. Avoid fees if at all possible and skip bonuses since we all know insurance companies are not stable because they give away free money. Fees and bonuses add restrictions, mostly in the form of income guarantees and if you want to get the most from the contract then you need to avoid the complexity.
All of the above are general guidelines and I could probably write an entire post to fill in all the details for each type of contract. Just remember it’s more about strategy than contract. If you spend too much time hemming and hawing over tiny differences then the annuity has not been put in the right context and you need to go back to the beginning and redefine your objectives.
My goal is to show you how an annuity can improve your situation and give you the best annuity to make it work. If I’m wrong and there happens to be a different contract that works better the difference will be negligible. Two similar contracts of any type will both do well if one does well so it’s really not worth trying to predict the future. By contrast I prevent a lot people from buying the worst annuity for their situation so being picky about the good ones doesn’t make a lot of sense.
Do your homework and due diligence and contact me if you want some consistent advice. My message doesn’t change and I’d be happy to go over it again if you need a reminder.
Enjoy your weekend!