Old habits die hard. And pre-conceived notions persist. Especially in the investment world.
While this applies to many subjects, I am specifically referring to annuities here.
Many advisors (myself included) have largely avoided annuities due to their high costs and the commission-based sales approach employed by many of the insurance companies that create them. But just as the term "mutual fund" means nothing until one knows what resides inside that structure, so too is the term "annuity" nothing more than a description of the box, not the contents.
Fortunately, times have changed, and many of those old conclusions are often no longer valid. Today's annuities are less likely to be commission driven. And the sheer scale of insurance companies' capabilities can be valuable to investors when they create cost-effective and innovative solutions.
With many of my clients approaching retirement, I recently decided to "dive in" and explore how annuities can be used in different relationships. I discovered a few use cases where an annuity can deliver a lot of value. Surely, there are others, but here are a few:
- Creating a synthetic "pension plan" -- Creating a growing and guaranteed income stream in retirement meets a key objective of many investors.
- Hedging against untimely withdrawals -- Guaranteeing a portion of the "income need" reduces the risk that withdrawals in bad markets undermine the account's ability to fully rebound.
- Diversifying investment return patterns -- Many annuities have innovative structures such as "dual direction" contracts that increase in value when markets fall and when they rise. (Yes, really.)
- Hedging against overvalued markets -- Structured products can offer principal protection while still maintaining most or all of the upside to a particular equity market index.
Sound too good to be true? Not necessarily. Surely there are unique risks here since we are depending on the strength of the insurance company. But as long as one chooses highly rated carriers (some of whom are 100+ years old), their ability to deliver on these contracts is very high. Diversifying among carriers also makes sense as a way to further reduce this risk.
At the same time, insurers are massive financial enterprises with the scale and resources to deliver low-cost investment solutions.
Needless to say, annuities aren't a good fit for every investor need. But they can be one more tool in the toolbox to help meet specific investor objectives.
We can let go of those old habits and mindsets, and if we don't mind a little paperwork, we could find much to like in this corner of the investment world.
Just let us know if you would like to learn more.