In June we welcome the Summer Solstice which is the longest day of the year and the official beginning of summer. June has other important days which we remember and/or celebrate. Of course, we know about Father’s Day and Juneteenth but did you know that there are literally hundreds of other national holidays that occur in June. June also has National Donut Day, Hug Your Cat Day, National Best Friends Day, Eat Your Vegetables Day, which ironically is the same day as National Apple Strudel Day, National Go Fishing Day, Take Your Dog to Work Day and many others. You should Google it sometime when you are bored. June also has Insurance Awareness Day so this month we will discuss insurance.
Insurance is an important part of retirement planning. There are many things to consider when trying to protect your assets against risks, both known and unknown. One of the ways to protect your assets against these risks is to have adequate life insurance. We often discuss this with clients during our review meetings. Sometimes there is a need for life insurance and depending on age and circumstances there are many different types to meet that need. And as life insurance has evolved over the years there are now products that help cover some of the expenses of long-term care as well. For many, the insurance question is also about mortality versus longevity.
But this month I would like to talk about another insurance product which is often part of the discussion in retirement planning. It is annuities. They are complex products which are often misunderstood. There is a lot of confusion and misinformation around annuities. Some people strongly oppose them and advise to never buy an annuity, including some very vocal and famous voices in the financial world. Other people sing their praises and talk about how beneficial they are in retirement planning. The important thing to remember is that they can play an important role in some people’s retirement but they might not be appropriate for many people. I will try to briefly share some benefits, features, and potential downsides with annuities. For more on Annuities: https://www.investopedia.com/articles/retirement/08/annuity-mutualfund.asp
The main type of annuity is what people refer to as “Lifetime Income Annuities” which work like a pension plan. Many provide an income that you can’t outlive, sometimes starting immediately and sometimes deferred. You decide how much you want to put into one and when you want to start taking money out of it or “turn on the income stream.” They can complement social security to meet an individual’s spending needs throughout their retirement. Its also important to ensure the Insurance Company you are buying the annuity from is a financially secure so that it can make the payments.
Two of the main benefits of a variable annuity with lifetime income is: 1) it grows tax deferred; you only pay taxes on the income that you take out of it and 2) it can give you an income stream that will last throughout your lifetime.
If you purchase an annuity in a tax deferred account, such as an IRA, you are losing the first benefit. That doesn’t mean that you shouldn’t do it. It just means that you should have a good reason to purchase it inside an account which is already giving you tax deferred growth.
The main benefit from this type of annuity is the income stream for life. That can be beneficial if you are worried about outliving your assets (longevity risk). The downside is that variable annuities are not only illiquid and can have penalties to terminate them, but they also have significantly higher fees. So, if you decide to utilize this type of annuity make sure you eventually start taking income from it.
Unfortunately, many annuity owners never turn on the income stream from their annuities, so they are paying those higher fees every year they own the annuity but never getting the benefit. It’s like towing a boat around wherever you go but then never using it. You are spending more on gas the whole time (like the higher fees on an annuity) but you never enjoy the benefit of the having the boat.
It is always good to review how any product will fit into your overall financial plan to make sure that your assets are protected, and you can live comfortably in retirement.
"Success is not final; failure is not fatal; it is the courage to continue that counts." - Winston Churchill
Make the most of every day,
Kurt, Jean, Anders & Molly