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“Annuity is a Curse Word”

“Annuity is a Curse Word”

| May 22, 2023

About a month ago, I was in a client meeting when the topic of annuities came up.  The client cut me off faster than when I am having a conversation with my wife and my three-year-old wants to tattle on his older brother. She told me, “The word “annuity” is a curse word in my house.”  Although annuities do not fit in everyone’s portfolio, many find that there are great benefits to them.  The one thing that I find many people do not realize is there are a variety of annuities that are trying to accomplish vastly different goals.

In my opinion, one of the greatest benefits to annuities is the fact that they grow tax deferred.  If you have $100,000 sitting in an account that is not a qualified account (IRA or retirement), you will be getting a tax form in the mail each year and will have to pay additional taxes on the gains in that account.  In an annuity, you can let it grow and not have to pay taxes until you take it out.

Fixed Annuities have been a safe haven for people who have been seeking shelter from the volatility in the market the last year.  A fixed annuity charges no fees.  The insurance company commits to paying a stated amount for a fixed number of years.  As of the first week of May, there were annuity companies with a 5.45% interest rate for seven years and another company with a 5.25% interest rate for five years.  The pro to this is that you know what you will be receiving for the duration of the contract.  The downside is you will not be able to make anymore than the stated rate of return.  Let’s look at a hypothetical:

$100,000 Investment for 7 years at 5.45%


Initial Investment=          $100,000

End of Year 1=                    $105,400

End of Year 2=                    $111,091

End of Year 3=                    $117,090

End of Year 4=                    $123,413

End of Year 5=                    $130,077

End of Year 6=                    $137,101

End of Year 7=                    $144,505


Variable Annuities are insurance products that allow you to pull an income from the annuity either immediately or further down the road when it is needed.  People who have a pension can vouch for the fact that it is awfully nice to have some sort of income outside of social security when you get into retirement.  VA’s are correlated with the stock market, which means they can increase or decrease in value. These annuities have fees and expenses that can sometimes catch people off guard.   On the low end, they may charge 1.3% annual fees all in.  On the higher end, annual expenses can look like 3.2% of the value of the annuity.  There are additional benefits that can come with variable annuities such as a guaranteed death benefit, usually being no less than the original amount, even if the value goes down.  There are other benefits called riders, such as an income rider.  An income rider will guarantee you a set amount on your future payments for the rest of your life, even if the value of your account falls to $0.  Although riders are nice, just know that it will increase the expenses on your variable annuity.  There is a use for variable annuities, but make sure you fully understand the fees that are associated with them.


Registered Indexed Linked Annuities (RILAs) provide the upside potential of a variable annuity, but with some sort of safety net.  These are annuities that are directly correlated with a specific index, such as the S&P 500.  This type of annuity allows you to participate in the upside of the market while providing a buffer if the market were to take a downturn.  There are RILAs that will provide for nearly unlimited upside potential while absorbing the first 10%-20% of the downside.  A lot of these annuities don’t come with any fees at all; however, you will forego the dividends that are paid to the insurance company.  The S&P paid 1.37% in dividends last year.

Hypothetical:  $100,000 Investment

-S&P was up 9.5%                                                                            -S&P was down 8%

-Your return would be: 9.5 – 1.37 = 8.13%                             -Your return would be 0%

-Your account value would be: $108,130                                -Your account value would be $100,000


Annuities are long-term investments designed for retirement purposes. Withdrawals of taxable amounts are subject to income tax and, if taken prior to age 59½, a 10% federal tax penalty may apply. Early withdrawals may be subject to withdrawal charges. Optional riders have limitations and are available for an additional cost through the purchase of a variable annuity contract. Guarantees are based on the claims paying ability of the issuing company.