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What Is an Annuity?
Annuities are contracts issued and distributed (or sold) by financial institutions where the funds are invested with the goal of paying out a fixed income stream later on. They are mainly used for retirement purposes and help individuals address the risk of outliving their savings. Upon annuitization, the holding institution will issue a stream of payments at a later point in time.
Annuity Types
Annuities can be structured according to a wide array of details and factors, such as the duration of time that payments from the annuity can be guaranteed to continue. Annuities can be created so that, upon annuitization, payments will continue so long as either the annuitant or their spouse (if survivorship benefit is elected) is alive. Alternatively, annuities can be structured to pay out funds for a fixed amount of time, such as 20 years, regardless of how long the annuitant lives.
Annuities can also begin immediately upon deposit of a lump sum, or they can be structured as deferred benefits. An example of this type of annuity is the immediate payment annuity in which payments begin immediately after the payment of a lump sum.
Deferred income annuities are the opposite of an immediate annuity because they don’t begin paying out after the initial investment. Instead, the client specifies an age at which they would like to begin receiving payments from the insurance company.
Fixed and Variable Annuities
Annuities can be structured generally as either fixed or variable. Fixed annuities provide regular periodic payments to the annuitant. Variable annuities allow the owner to receive larger future payments if investments of the annuity fund do well and smaller payments if its investments do poorly. This provides for less stable cash flow than a fixed annuity but allows the annuitant to reap the benefits of strong returns from their fund’s investments.
While variable annuities carry some market risk and the potential to lose principal, riders and features can be added to annuity contracts (usually for some extra cost) which allow them to function as hybrid fixed-variable annuities. Contract owners can benefit from upside portfolio potential while enjoying the protection of a guaranteed lifetime minimum withdrawal benefit if the portfolio drops in value.
Other riders may be purchased to add a death benefit to the agreement or to accelerate payouts if the annuity holder is diagnosed with a terminal illness. The cost of living rider is another common rider that will adjust the annual base cash flows for inflation based on changes in the CPI.
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#Annuity #Retirement #FinancialPlanning
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LEARN MORE ABOUT: Retirement Annuities
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Thanks for watching everyone! If you found this video helpful, then consider giving it a LIKE to support my channel. Also check out my video on the difference between Term and Whole Life Insurance here: https://youtu.be/gbnlFXJlfEg
I'd rather keep the money under my mattress than use an annuity. Crazy and foolish but that is how much I hate annuities.
I purchased a FIA 8 years ago for around $500k. It continues to be the best decision I have ever made. Why? Because I bought it to be my "bond" part of my portfolio. It is my "40%". Today. July 16, 2022 with the market down over 20% my so called 60% stocks are now worth less than my "40%".
This video simply makes no sense. I am about to retire in a few months because of my FIA's……….not because my stock portfolio is down 30%……..but rather I can retire despite my stock portfolio being down 30%.
Jake, I love your videos on things such as which platforms to use……..but when it comes to something like this you just do not know what you are talking about.
Also single premium immediate annuity the commission is included…..
Lol so tell me what other investment Guarantees payment every month for the rest of your life….. your ignorant to annuities
Jake, first of all thank you for your service. I myself was in the Army and spent several years in Iraq.
Regarding your financial recommendations… I don’t see any credentials such as RICP, nor any licenses to be a financial advisor. I’m also not going to try to prove you wrong because math and science already has. This is more for your subscribers and to help you understand the difference between saving for retirement vs retirement income during retirement.
An (a good immediate income annuity) annuity is actually a very good tool to have in your portfolio (you will have 2 yourself! Military Pension (an annuity) and SS (an annuity)). You don’t have the education or knowledge to build a retirement income plan so I won’t hold anything against you other than giving some but not all bad advice.
When we are saving for retirement, investing in the stock market will always beat an annuity and is what we should be doing while SAVING for retirement. Average returns mean EVERYTHING when building wealth.
However when we get to retirement average returns mean NOTHING. We are now taking withdrawals from our assets. The only thing that matters now is SEQUENCE OF RETURNS. Sequence of returns is the number one factor when it comes to withdrawing from the market. This can wipe out any portfolio.
The purpose of retirement is to never outlive your money. Longevity is the biggest risk retirees face. If a retire can add guaranteed money to their portfolio that covers their daily living and normal lifestyle, the investments that are in their portfolio can be invested more aggressively and gaining more interest because they won’t ever have to live off it. Is all PLAY MONEY! The client can spend as much as they want and never have to worry about running out of money.
Another note… retires don’t care about making as much money as possible. That phase of their life is over. It’s all about not running out of money, security and enjoying life. I know you will love your 2 annuities when you retire as well because everyone loves having guaranteed money in retirement that they can never outlive.
President Obama, his administration put a rule on annuities that the sales people must follow a fiduciary standard. They could only sell the best annuity if it truly fit the clients purposes. The sale of annuity went down 30% per year for several years. The Trump administration reverses rule, and annuities went up their sales went up dramatically. I am a retired estate planning attorney. I had lots of experience looking at the portfolios of elders. I thought that most of the annuities that were sold to these elders were junk! Something that really gets to my craw, is that these financial planners, they called them selves financial planners but all they sell is annuities and life insurance! They infiltrate churches, and then pray on some of the naïve older members and talked him into buying these annuities. And I totally agree with your analysis. Why not just put the money in long-term bonds with VanguardAnd probably aA better return on your capital
Annuities are designed to protect against two major risks retirees face: 1. Longevity Risk: When someone retires they have to design their retirement plan to last until they die. But when will they die? 80, 90, 100? You probably decide to plan for roughly the worst case. In order to increase the probability a portfolio will last, a higher stock allocation may be needed which increases #2 Sequence of Returns Risk: If the market performs very poorly the first couple years of your retirement, your odds of running out of money increase dramatically. If self-insuring, you have to plan for the worst case (and spend much less) or risk running out of money if you live longer than expected or sequence of returns are bad. An annuity lets you pool these risks, so you can plan for the average case and have a possibly higher guaranteed monthly income for life. This means you can spend more like you will only live until age 82, instead of possibly 100. Maybe ~85-95% (speculating here) percent of cases it would be better to self-insure, but some people aren’t comfortable with say a 5% chance of running out of money. I don’t think basic SPIAs or DIAs are that bad, if you want to insure against these risks. Depending on risk tolerance, it may make sense to have annuities to cover necessary living expenses.
Nice and simple — No. don’t do it.
I was talked into a variable annuity 5 years ago. Put in 50000. 3.25 % guaranteed. When I learnt about stock market, I pulled out everything and invested during the covid crash. I had to pay the penalty, but I more than made up in gains in the last 1.5 years.
I often thought about buying a 100K annuity but then realized if I took 5 quality non-destructive NAV (Net Asset Value) CEFs of 3 equity CEFs and 2 bond CEFs, putting 20K into each, I'd be so much better off with monthly income and also have the $ available if I need it.
you saved my money! was about to apply annuity this week but stoped after watching your video. thanks!!!
Annuity calculator says payout for $1m investment is $3,188.18 per month for man, or $2,860.30 for woman…. Probably due to woman usually lives longer. At this rate, man needs 26 years to get $1m back. Who will buy this? But there are buyers. This performance is lower than tax free municipal bond.
If you listen to Sunday morning radio, you are likely to hear someone selling annuities. But the word "annuity" is never mentioned. Just claims like "Your principle never goes down" and "When you die you will leave your spouse $$$." Each of these statements has some truth to it. An annuity is a mix of an investment program and a life insurance policy. The rules, like when can you take out your money, are complicated as hell.
My NO comes from an old investment rule: If you don't understand it don't buy it.
Hey Jake, thanks so much for good quality information, when you were talking about the 0 % capital gains rate, you stated that you could be in that bracket if your income from capital gains was less than 40,000 dollars, isn't it your total taxable income? just wanting to make sure I understand.
YouTube must be listening to my convos. Was just talking about how dumb these are
Jake, You need to update your facts a little bit. I made over 15% return in my annuity last year. There are annuities that are indexed to the market that generate similar returns as the index, but with the added security to never lose money. This security is highly valuable. I noticed you started your index fund growth in 2009. Do that back 20 or better 30 years to see the return you might expect over your retirement savings window. Annuities can be deferred taxed like a 401(k) or IRA, or they can be like a Roth IRA in which the will provide tax-free growth. Your concern over life insurance company solvency isn’t accurate either. How many insurance companies have gone under in the last 100 years (clue, almost none due to the regulation by the government ). Compare that to how many brokerage firms have, and how many stocks have lost money. Much more investment risk in brokerage account. I echo other comments around your withdrawing money from a brokerage account without paying taxes. As far as fees go, yes the first few years (usually 7 or 10) you are subject to withdrawal penalties if you withdraw early (but these are typically retirement funds that have additional governmental penalties for early withdrawal). Look at the total fees over the life of the product (I’m assuming 40-50 years) and you will notice the fees are very low compared to a traditional index fund. Remember your index fund charges you a % every year for the same service. Not a big cost when starting, but becomes very large when you are at retirement age . BTW, you do not have to give up control of your money in an annuity. It is a choice to annuitize (transfer of ownership in order to get guaranteed income). I plan to keep accumulating for my life and never annuitizing.
Why on Earth are they pushing annuity options within 401(k)s into Secure Act 2.0? That is the only part of the act that seems like a step backward.
Heck no to annuity I rather keep the money in an index fund pass it to my family if pass away. When I retire from the military I am going to take-out 50% lump sum out front from the blended retirement program.
My financial advisor just had me buy a $100,000 – 10 year AIG Fixed Income IRA Annuity. I think I can take out &10,000 each year to convert to a Roth … now I’m confused