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Annuities in Retirement: Pros and Cons - Should You Buy an Annuity? - YouTube
Channel: Your Money, Your Wealth
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So the other day a client of mine asked me,
“Is an annuity right for me in terms of
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how it fits into my overall retirement income stream?”
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And the answer that question, as with many
different types of investments,
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is it totally depends.
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The first thing you need to do is understand
what an annuity actually is.
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Typically it's a contract with an insurance
company where you submit funds - you invest
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with the insurance company - and your funds
will accumulate over time.
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At some point the future, the insurance company
will start paying you out money for that investment
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income in the form of a lump sum or a series
of payments over your lifetime - and typically
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people will receive a series of payments over
their lifetime.
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So why an annuity might make sense for a portion
of your retirement funds is to supplement
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other sources of income that you may already
have - so pensions, Social Security,
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things like that.
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So in some respects that can be a very good
idea to help give you that guaranteed income
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stream, which is what a lot of us are looking for.
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Now there's two types of annuities.
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There's what are called fixed annuities and
variable annuities.
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Fixed annuities are basically what they sound:
you invest your money.
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The insurance company promises to pay you
out 3 percent per year or 4 percent per year
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over the next 10 years, and then they pay
you an income stream over
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the rest of your life.
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A variable annuity is a little different.
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You invest your money and then you have the
ability to put your money into different,
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what are called sub-accounts, and they’re
sort of like mutual funds
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within the insurance wrapper.
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One of the challenges with variable annuities
is the fees inside the products can be extremely
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high inside of those separate accounts.
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With fixed or variable annuities, one of the
things you absolutely want to be sure of is
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that you know what the commissions are of
the agent that's selling you the product.
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So what I'd recommend if you're looking at
an annuity, is A, work with a fee only financial
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advisor that's not earning commissions off
of these products.
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Because then you know you're going to get
the right advice for you.
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Now back to variable annuities.
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Why they might make sense as they might give
you a little bit of a better chance to outpace
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inflation because you're investing in market-type
securities inside of the products.
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So now your money grows over time in a fixed
or variable annuity, then you start to receive
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an income stream over, typically, what might
be the rest of your life.
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Now some of the advantages of annuities:
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Number one, you cannot outlive the income
stream, typically.
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So if you live to 75 or 95 or 110 years old,
that annuity stream continues to come in,
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so long as you're investing with a reputable,
financially sound insurance company.
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So you want to check the ratings of the company
that you're investing with to make sure they're
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gonna be around in 10, 15, 20 years.
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So that's typically why people use them.
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One of the things you want to be aware of
is today, most insurance companies have what
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are called riders on their variable annuity
products.
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And what that means is it basically says that
your money is going to be invested in these
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types of mutual funds and there's a guarantee
built in, in this column over here, that says
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that your money is guaranteed to grow for
at least, let's say, 6 or 7 percent per year
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versus what the market does.
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So if I invest $100,000 over a 10 year period,
this guaranteed 7 percent grows to $200,000.
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And then they're going to pay you out, for
instance, 5 percent per year over the rest
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of your life.
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Well, let's say for instance you invest at
65 years old.
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Your money grows for 10 years, and then it
pays you out for another 20 years.
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So $200,000, five percent, that's gonna be
$10,000 a year.
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It's going to take you 20 years just to get
your $200,000 back out of the product.
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So the point here is be aware of things that
sound too good to be true.
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Because if I could invest my clients money
in a product that would guarantee them 7 percent
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per year while it was growing, and then 5
percent per year while I was paying them out,
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I would put virtually all of my clients’
money into it.
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It doesn't work that way, there's a lot of
smoke and - smoke and mirrors, excuse me,
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as it relates to fixed and variable annuities.
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So be cautious, beware.
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I would say one of the things I would absolutely
want to caution people is don't put all of
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your money into a fixed or variable annuity,
but a portion of it might make a lot of sense.
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Beware of the commissions that are involved
and the fees you're paying inside
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the product as well.
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And then absolutely make sure you see a fee-only
financial advisor that’s looking at your
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entire financial picture to give you the proper advice.
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For any further information on this topic,
send us an email at PureFinancial.com.
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