Why I’m a Big Fan of Annuities and Why You Should Be Too
As a wealth manager with decades of experience helping clients grow and protect their assets, I’ve seen firsthand the value of annuities as a cornerstone in a diversified portfolio. In my early days in the industry, I too had doubts about them. But after working with numerous clients, navigating market fluctuations, and dealing with unexpected life events, my perspective on annuities has shifted. Now, I am a passionate advocate for including annuities in virtually every portfolio, regardless of a client’s net worth.
Let me explain why. I’ll share an impactful story of one of my clients whose annuity saved them from financial ruin when the stock market crashed—while also providing financial security when they became very ill.
A Story of Protection When Life Throws a Curveball
A few years ago, I worked with a client, Thomas, who was nearing retirement. He had saved diligently over the years and had accumulated a healthy stock portfolio. He had also amassed significant wealth through real estate investments. However, when the stock market experienced a sharp downturn, Thomas’s portfolio was hit hard—losing over 40% of its value in just a few months. To make matters worse, Thomas was diagnosed with a serious illness that required him to take extended time off work and undergo costly treatments. He found himself in a precarious position. His health was declining, and the value of his investments was rapidly shrinking.
Fortunately, Thomas had also invested in an annuity. This decision, though initially met with some skepticism from him, proved to be a financial lifeline. His annuity offered him a guaranteed stream of income, which continued to flow regularly even as his other investments struggled. Not only did this provide a sense of stability during his medical challenges, but it also allowed him to cover his living expenses and medical bills without needing to liquidate assets at a loss.
Had Thomas not had that annuity in place, the combination of market volatility and health-related expenses could have seriously jeopardized his financial future. His story is a testament to the protective benefits of annuities, especially during times of crisis.
The Differences, Advantages, and Disadvantages of Fixed and Indexed Annuities
Annuities come in various forms, but I want to focus on two types I recommend to most of my clients: fixed annuities and indexed annuities. Here’s a breakdown of both:
Fixed Annuities
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How They Work: With a fixed annuity, you deposit a lump sum (or make periodic contributions), and the insurance company guarantees a fixed interest rate for a specified period, or even for life, depending on the type of contract you choose. You’ll receive a set payment for either a certain number of years or for the rest of your life.
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Advantages:
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Predictable and Safe: Fixed annuities provide predictable, stable income. The principal is protected, and the rate of return is guaranteed.
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No Market Risk: There’s no exposure to market volatility. Regardless of how the stock market performs, the insurer is contractually obligated to pay your agreed-upon amount.
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Simple to Understand: Fixed annuities are straightforward, which makes them easy for clients to grasp.
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Disadvantages:
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Lower Return: Because of the guaranteed nature of the product, fixed annuities typically offer lower returns compared to other investment vehicles like stocks or mutual funds.
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Inflation Risk: If you lock in a fixed payout amount, inflation could erode the purchasing power of your income over time unless you purchase an inflation rider (which could come at an additional cost).
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Indexed Annuities
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How They Work: An indexed annuity’s return is linked to the performance of a market index, like the S&P 500, but it comes with a cap on returns and a floor that ensures you won’t lose money in a down market. The insurance company takes a portion of the market’s return and credits that to your account.
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Advantages:
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Potential for Higher Returns: Indexed annuities provide the opportunity for higher returns based on the performance of the linked index, without the downside risk of market losses.
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Market Participation with Protection: You have the potential to benefit from the upside of the stock market while ensuring that you’re protected from market declines. This is particularly attractive for clients who want growth potential but don’t want to risk their principal.
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Flexibility: Many indexed annuities offer various options for riders or additional features, such as adding long-term care or death benefit riders.
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Disadvantages:
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Caps and Spreads: While you can potentially earn more than a fixed annuity, your returns are capped by the terms of the contract. The insurance company might only allow you to participate in a portion of the market’s upside.
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Complexity: Indexed annuities are more complex than fixed annuities, which can sometimes make them difficult for clients to fully understand.
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Why I Don’t Like Variable Annuities
Now, let me be clear: I’m not a fan of variable annuities—and I firmly believe that most clients should stay away from them. Why? While they offer potential for higher returns (since they’re directly tied to the market), they also carry a significant amount of risk.
Here’s why I avoid them:
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Market Exposure: With variable annuities, the value of your contract fluctuates directly with the market. While there’s the potential for growth, you could also see your account value decrease if the market takes a downturn.
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High Fees: Variable annuities often come with high fees, including management fees, mortality and expense fees, and sometimes surrender charges. These fees can eat into any potential gains and diminish the overall value of the annuity.
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Complexity and Lack of Predictability: Variable annuities are often marketed as offering market participation with some protections, but their complexity and volatility make them less attractive for most people who seek stability and predictability in retirement.
Why Everyone Should Have an Annuity
It doesn’t matter how much money you have or how old you are. The benefits of annuities are clear for a wide range of individuals. Here’s why you should consider adding one to your portfolio:
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Predictable Income for Life: One of the greatest benefits of an annuity is the guarantee of a stream of income that can last a lifetime. Whether you’re looking for consistent retirement income or simply want peace of mind knowing you won’t outlive your money, annuities provide that certainty.
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Protection from Market Volatility: As I mentioned earlier, the stock market can be unpredictable. An annuity, particularly a fixed or indexed one, can shield you from market downturns, so you don’t have to worry about the ups and downs impacting your essential income or savings.
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Longevity Risk: With people living longer, there’s a growing concern about outliving one’s savings. Annuities help mitigate this risk by offering the security of lifetime income, no matter how long you live.
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Diversification and Risk Reduction: Including an annuity in your portfolio is an excellent way to reduce risk. While stocks and bonds may provide growth opportunities, an annuity offers protection and guarantees—giving you the best of both worlds.
Final Thoughts
As someone who’s spent years managing wealth and helping clients protect their financial futures, I can tell you with confidence that annuities should play a role in everyone’s financial strategy—no matter their age, wealth, or risk tolerance. The stability, protection, and guaranteed income they provide offer unmatched peace of mind in today’s unpredictable world. Whether it’s a fixed annuity for safety, or an indexed annuity for growth potential with protection, these tools can help you sleep easy at night.
Don’t let the noise around variable annuities cloud your judgment—stick with what works. And if you haven’t already, I highly encourage you to consider adding an annuity to your portfolio. It’s an investment in your future that you won’t regret.