Annuities are a Safe Investment in an Unstable World

"When the tide goes out you can see who's been swimming naked" -Warren Buffett Everybody looks like a genius when the markets are doing nothing but climbing. But we all know that markets can go down as well as up. In fact, the often do. Stocks of any kind are innately risky, and there are never any guarantees. For that, you have to go with annuities.

Annuities vs. Mutual Funds

Mutual funds are pretty straightforward: You and a bunch of other investors pool your money and hire a money manager to make investments on your behalf. However, you own a direct fractional interest in everything in the fund. When the assets in the fund go up, you make money. When they go down, you lose money. The fund company owes you nothing beyond the performance of the portfolio, minus expenses. Annuities are different. These products are specifically designed for you to convert to income at some point in the future. You don't own the securities directly. Instead, you own a contract. This contract can be structured in a wide number of different ways, but generally promises you a specific interest rate on your premium, or a specific monthly or annual payout, or a specific guaranteed minimum payout of some kind. While there are fixed annuities that are contractually guaranteed not to lose money, and there are variable annuities that may lose money but may include other contractual guarantees, such as a guaranteed minimum income rate when you annuitize the contract, what they all have in common is this: You are not directly exposed to market ups and downs, because you don't own a direct interest in the portfolio. The insurance company, not you, owns the underlying securities. This allows you to partially or completely "opt out" of market risk. Because annuities are not directly tied to potentially wild stock market swings, they may be terrific ways to 'lock in' a minimum acceptable interest rate or future payout. As long as the insurance carrier is able to remain financially solvent, they are contractually obligated to provide you with the income or sum promised.

Immediate vs. Deferred Annuities

Again, annuities are financial products designed to be converted to income at some point in time. With immediate annuities, the stream of income begins right away. With deferred annuities, the stream of income starts later. Meanwhile, your premium contribution accrues tax-deferred. You pay no tax on earnings within annuities until you annuitize, or take income.

Lifetime Income Annuities

These are the simplest annuities to understand. These contracts provide a fixed and predictable level of income to the annuitant for the rest of the annuitant's life, or for the joint life spans of the annuitant and a secondary individual, who could be a spouse, child or grandchild. You put money in (in the form of premium,) and you receive a set monthly or annual income for life, guaranteed. No matter what the markets do.

Fixed vs. variable

These are deferred annuities. Fixed annuities guarantee a specific interest rate, where variable annuity balances will vary depending on the particular sub-accounts you select. Your guarantees in the contract are calculated based on the eventual performance of the securities the annuity company holds within these sub-accounts. But they cannot provide less benefit than your annuity contract guarantees. At any rate, even variable annuities provide a 'death benefit:' if the annuitant dies, the insurance company will typically pay out to heirs at least the premium the annuity owner paid in - regardless of how well the stock market or bond markets have been performing.

Annuities and market risk

Annuities are useful tools for controlling risk because they can insulate the individual's portfolio from the larger movements of the market, either partially (in the case of variable annuities that still have minimum income, minimum lifetime benefit, or other guarantees written into the contract) or completely (in the case of fixed annuities and lifetime income annuities.) If you need to save money for retirement or for some other future expense, you can lock up the money for several years, and you want to control or eliminate market risk, an annuity may be a suitable option for you. Choosing annuities is a very individualized process. The annuity or combination of annuities depends on your own individual tolerance for risk and your financial goals and timeline. For more information, feel free to Contact Neptune Financial to schedule an appointment.

Basic Understanding

This blog is being provided for informational or educational purposes only. It does not take into an investment objectives or financial situation of any individual, family, prospect, client, or prospective clients. The information is not written or intended as investment advice and is not a recommendation about managing or investing your retirement savings. An individual seeking information regarding their investment or retirement needs should contact a financial professional. Neptune Financial, and their financial professionals do not render tax and legal advice. Please consult your tax and legal advisors regarding your personal tax or legal concerns.