Annuities

From now on, forget your previous notions about annuities. From now on, substitute the word annuity with: income for life.

For example, “I am buying this type of annuity because I want an income for life.” “I have structured my portfolio with dividend paying stocks, which act as an annuity because I want an income for life.” “I own a combination of stocks and bonds in my portfolio because when I retire, the cash from these investments will act as an annuity because I want an income for life.”

The words annuity and income for life should be synonymous in your mind.

There are four types of annuities and they all have the same purpose, to provide income for life. They are deferred annuities, fixed annuities, indexed annuities and variable annuities. As of today, the only one we would consider is the deferred annuity but it is instructive to understand why we currently do not recommend the other three. However, we include them because a number of our fans own these products. They are looking for alternative ways to invest the assets in these products either more intelligently or cheaper.

Fixed

Fixed annuities were once very popular amongst advisors as were certificates of deposit or CDs. However, because interest rates are so low, they aren’t able to generate a sufficient return. This translates into an inadequate income for life. We are not recommending any fixed annuities at this time because, in our opinion there are better investment alternatives.

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Indexed

Indexed annuities rose to popularity after 2008 since they were amongst the best performing investments during the 5-year period ended 2008. Indexed annuities are typically associated with one or more volatile indices. The terms seem wonderful but when you do the math, they lose their appeal in our opinion and we don’t recommend them. We think there are better investment options available.

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Variable

There are two types of variable annuities on the market – accumulation variable annuity and deferred variable annuity. The first type accumulates capital on a tax-deferred basis and we would never buy one of these. The second type acts as a deferred annuity and provides a guaranteed income for life. It essentially acts as a complicated deferred annuity and while we do not recommend complicated products we have seen some that may work.

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Deferred

We generally recommend single premium deferred annuities for individuals and couples near or at retirement. A single premium deferred annuity is easy to understand – you sign a contract with an insurance company that you understand immediately. What we like about this product is it helps solve multiple problems at once.

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