Pensions & Annuities
Most people seem to know and understand pensions. You work for 4o years, you retire, you get a check for a certain period of time, usually for the rest of your life. Social Security works in a similar fashion.
Now let’s chat about annuities. Annuities have existed in their present form for decades but the concept dates back to the Roman Empire. Yet I mention the word annuity and people get a deer in the headlights look. What they are and how they work does not come up in the daily lives or discussions of average Americans, so the word tends to make people nervous and uncomfortable.
Generally speaking, a pension, social security, and annuities have similarities—money goes in then at a later date you get a check. One big difference between a pension and an annuity is that an annuity is funded entirely by you.
Where does the money come from? In many cases a retirement annuity is funded in one lump-sum, such as from an inheritance or maybe a transfer from your 401(k) or IRA. So you save money in your 401(k), you work for 40 years, money goes into an annuity, you get a check, which can be for the rest of your life.
So why would a person move their hard earned money or inheritance into an annuity? Well, because it may provide peace of mind. One of the problems facing retirees is that they may spend their money too quickly, it may not grow enough during retirement to last, or a crash in the market might decimate their investments when they need it to live.
Pensions, social security, and annuities provide a certain amount of security and peace of mind given that this risk has been transferred to someone else. As you may have guessed, an annuity is an insurance policy.
Generalizing? Yes… There are many different types of annuities and each type has a variety of internal mechanisms that will provide you, your spouse, and your beneficiaries with certain guaranteed results.
Complex? You betcha… A variable annuity is an insurance contract with an investment mechanism and regulations require the person selling it to have an insurance license, a securities license, and a variable contract license.
Costly? Yup, they can be very expensive. Peace of mind is not cheap.
So there are hundreds of different types offering all sorts of bells and whistles, they are complex, and they can be expensive. How are you supposed to make a decision? This is an important question and you should be very careful.
Does the agent offering it to you understand what they are offering and how it works? How did your agent come to choose the particular riders and benefits? What is the surrender period? What is your cost? Can your agent explain, in detail, how you will be taxed on withdrawals? Can they explain how your beneficiaries will be taxed?
How did your agent come to choose this one annuity from the hundreds which are available? Ask specifically… what is your agent’s commission on this product? Be aware of annuities or life insurance contracts that have large commission payouts. Once you sign the contract it can be costly to surrender it. In many cases, an annuitized contract cannot be undone.
So you think you may still need an annuity or maybe you already own one and are not clear how it works. What should you do? Consider a review and/or a second opinion.
Engage a financial professional who can create a plan that is as unique as you are and is held accountable for the advice they give. Any financial product should be evaluated for suitability and structured to your life objectives. Consult a financial professional if you are in the market for insurance or investments.
The information presented here is for educational purposes only and shall not be construed or interpreted as a solicitation to sell or offer to sell any specific securities, investments, or investment strategies. 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.
John Essigman Wealth Advisors LLC, a Registered Investment Advisor, offering fee-only financial planning, trust management, and investment advisory services in the State of Georgia and where otherwise permitted by law.
141 North Main St
Cleveland GA 30528