Are annuities a good retirement investment?
My spouse and I are 70 and 67 years old and retired. We have a fixed and variable annuity. Is this a good investment for monthly income? We sometimes need extra income for home maintenance.
Fixed and Variable annuities sound like "deferred annuities". An immediate annuity is what many people use to provide monthly income. I wouldn't call any annuity an "investment", but rather a product.
The types of annuities you currently have (fixed and variable) are structured more like an investment - with much higher costs than typical vehicles like mutual funds and ETFs. You can access the money when you need it, and it should provide you with some level of return on your money over time - so you can begin to take a monthly withdrawal to use like income, and then are also able to dip into it for home maintenance or other costs at times.
An immediate annuity effectively has you hand over your principal to an insurance company for the promise of lifetime income. The money is no longer yours, and you are in a contract that pays you a stated amount for life (or some term). This is an insurance product, definitely not an investment. Your principal is not available to dip into, and your heirs or favorite charities will not get what's left when you die - the insurance company will.
For a 67 and 70 year old, when you buy an immediate annuity, or "annuitize" your variable or fixed annuities, they'll likely pay you around 8% per year of the principal. But that 8% is not a "return on your money", but rather a "return of your money" for the first 12 years (8%*12=96%).
I think if you like that idea, then it's a good idea. Often people don't understand the trade-offs of annuitizing or buying an immediate annuity.
I have a preference toward investing in a low-cost, diversified investment portfolio, and generating yield that I can use as income, and price appreciation that I can scrape off the top of my principal for things like home maintenance. Another good strategy is annuitizing enough of your money to get your basic monthly expenses covered, and then investing the difference for extra income, and for larger items like a new roof some day.
I hope that helps identify the good and bad of annuities as retirement income solutions.
With your limited information this is a difficult question to answer. After being in the financial services business for over 25 years and knowing what I know now, I personally am no longer a fan of annuities because of all the stipulations they have and high expenses. Most annuities seem to benefit the insurance company and sales representative more than they do the person buying them creating a conflict of interest. But, since you are already in annuities and could have a large surrender penalty if you wanted to get out of them, without knowing if they have a guaranteed income benefit, they may or may not be a good investment option for monthly income. Bottom line is: your question is one that can only be answered correctly by a financial advisor that better understands your entire financial picture. My suggestion is you find a fee only based advisor that does not sell annuities as one of their only options for retirement income. They are out there but the temptation is so great for the high commissions annuities offer, you have to seek out a fee based advisor and then ask them how they feel about annuities.
This answer is intended for informational purposes only and is not intended to provide specific tax, legal, or investment advice. I invite you to schedule a meeting with a me for more information regarding your specific situation.
This depends on your situation and with whom you talk to. If you want the "guarantee" then yes. If you want to pay for the extra riders and the income/death benefit they offer, then yes. I personally do not sell annuities. (I'm not saying anything negative about those who do, either.) I am a stock and bond guy. I believe the market is efficient to a degree and believe that you can receive the 5% in income based on dividends and gains on the market. With that being said, it never hurts to diversify to a few annuities to get your "guarantee". The insurance companies are highly insured themselves and have a lot of liquidity and experience in this market. If it helps you sleep at night to have that fixed amount coming in everything month, then yes. If you can withstand the ups and downs of the market, then I say no, you don't "need" an annuity. Annuities can be very expensive and will cost you more in the long term.
I hope this helps.
If you have not officially "annuitized" your annuities then you do have the ability to take out funds as you need them. Generally annuity owners "annuitize" their accounts and trade the value of the annuity for guaranteed lifetime monthly payments. This means you cannot withdraw more money than what you are getting monthly. Prior to officially annuitizing however you have access to your funds however and whenever you want them. If you need funds for home maintenance you should plan on having your monthly income exceed your needs so you can put aside funds for maintenance. Annuities can be a good part of a retirement plan but should not be your entire plan given their inflexibility.
Without knowing your full picture & assets, I cannot give you great advice. I can give you my generic thoughts on annuities though, and while I have my insurance license, I do not "sell" annuities because of all their problems & negatives. Once you begin to take money out, it is ALL income first & return of principal second. So if you originally invested $100k & now its $200k, the first $100k is income. That is if it was done in a taxable account. If it was done in an IRA, it doesn't matter because the IRA was already tax deferred so there is NO reason to put IRA money inside of an annuity in my opinion. But it is often done because that's where the client's money is. No money, no big commission. That is also what the new Fiduciary Rule is specifically addressing. Ask your advisor if he is your Fiduciary? Point is, annuities are not tax efficient once you begin taking money out and there are other, better ways to be tax efficient.
If you are talking about "annuitizing" versus just taking a distribution on demand out, that is even worse. Because you just gave up the entire lump-sum for an income stream for life. So when you or your surviving spouse dies - depending upon whether the income stream is higher on a single life or lower income on a joint life 2nd to die - the insurance company keeps the remainder. If you guys have a fatal accident a few months or even a few years after annuitizing for monthly income, the entire lump sum is lost. Now that may not matter to you, but if you have heirs and it does, just wanted you to be aware. But you can create your "own" monthly cash flow or income stream if done properly and can adjust up or down, stop all together, and restart when you need it. With "annuitization" you normally give up flexibility for "extra income."
Another problem is most annuities are very expensive & the ongoing fees and expenses are exorbitant. Most average between 2% to 3.5% per year ongoing even after paying the big upfront commission with long surrender penalties. Lastly, most have limited investment choices. So again, I do not use them or sell new ones.
Now I do have a few clients who came to me with existing annuities they inherited or had for a long time in taxable accounts with big gains. They didn't want to pay the taxes so we rolled the assets via a like-kind-exchange into a no-load, no-commission fee based only annuity. The ongoing fees are .45% per year and they have well over 200 funds to choose from. They include all types of equity funds including index & sector funds both long and short, bond funds, commodity funds, currency funds, precious metals funds, guaranteed fixed funds (like a fixed annuity), and professionally managed advisor funds.
You can put the money in one week and take it out the next without any fees or surrender penalties. You don't hear about these because the agent doesn't make a commission off of these. They are really for fee based only advisors or individuals who want to manage on their won. And I still wouldn't do this with new, unencumbered money and only with an existing annuity in a taxable account to better manage. If you annuities are in an IRA, you can simply do a custodian to custodian IRA rollover at a discount brokerage firm (assuming no surrender penalties still exist). Then you can manage within the IRA (no longer in an annuity) and take distributions as needed, even on a monthly basis. Then you can also take out extra as needed. Again though without knowing your current asset base and level of knowledge, I cannot provide better advice but you or someone will have to manage your assets well in order to ensure you have a successful retirement and don't outlive your asset base.
That's my two cents. Hope this helps and best of luck, Dan Stewart CFA®