You Need to Know What You Want
By Saghir Aslam
Rawalpindi, Pakistan
(The following information is provided solely to educate the Muslim community about investing and financial planning. It is hoped that the Ummah will benefit from this effort through greater financial empowerment, enabling the community to live in security and dignity and fulfill their religious and moral obligations towards charitable activities)
Annuities are sold sometimes as a source of retirement income and sometimes as a way to invest in the market and manage taxes. Decide why you might buy; do you want income now (deferred)? Do you want a predictable payout (fixed income) or payouts that rise or fall with the financial markets (variable)? If you’re on the cusp of retirement and your goal is to create a pension like, guaranteed income, you can ignore the noise simply by a single-premium immediate annuity.
If your goal is to invest, you have other options. The fastest-growing annuity nowadays is a fixed indexed annuity. You put your money in and you get a return linked to (not necessarily matching) the performance of a market barometer such as the standard and Poor’s 500 index of large US stocks. Generally, your investment is protected if the index declines, while your gains might be lower than those of the actual index. With a variable annuity, you pick from a menu of stock a bond funds and let that money grow tax-deferred. You can add on your features (called riders) that protect your principal and let you look in a minimum income, usually with what is called a guaranteed lifetime withdraws benefit (GLWB) . And in most cases, your heirs can inherit a death benefit.
Safety Comes at a Cost
The price of the protection can be high and tough to tease out. Basic fees, plus the cost of a GLWB rider, might add as much as 3 percent annually. So, if you invested $6,000 annually in a variable annuity that returned 7 percent per year before expenses were detected, you’d have about $ 75,000 in your account after 10 years. But with a mutual fund charging, say, 0.2percent actually, the same market performance would leave you, after expenses, with $87,700.
Limits on fixed-indexed (sometimes called “equity-indexed) equities are another cost. If an insurer caps annual return of an S&P500-linked annuity at 6 percent, that is the most you’d earn in a year - even if the S&P gains 19 percent (as it did in 2017). And if you want to get out of a fixed-indexed or variable annuity, you might pay a hefty “surrender” charge, practically in the first year after buying it.
Still such an annuity with a guaranteed benefit might be a good choice, if you can’t stand risk. “For the persons who want to buy anything other than CDs and bonds, get a variable annuity with a GLWB rider,” Hopkins says. “The livelihood is that it will outperform CDs and bonds.”
The Seller-And Salesperson-Matter
Shop for single premium immediate annuities sites such as immiadete annuities.com or income solutions.com, which have quotes from various insurances. Pick an insurer with a high grade (say -rated at least A- by the firm A.M. Best). “All you need to know is the credit rating and payout,” says CPA Mike Piper, author of the oblivious investor blog.
Comparisons are tougher for a fixed-indexed annuity or variable, but be sure to understand the fees and surrender charges that you might face. Both vanguard and fidelity offer relatively low-cost variables.
Finally, if a financial adviser suggests buying and annuity, ask what your alternatives are. “A variable annuity will be the only tool in the shed,” says Breanna Reish, a certified financial adviser.
(Saghir A. Aslam only explains strategies and formulas that he has been using. He is merely providing information, and NO ADVICE is given. Mr Aslam does not endorse or recommend any broker, brokerage firm, or any investment at all, nor does he suggest that anyone will earn a profit when or if they purchase stocks, bonds or any other investments. All stocks or investment vehicles mentioned are for illustrative purposes only. Mr Aslam is not an attorney, accountant, real estate broker, stockbroker, investment advisor, or certified financial planner. Mr Aslam does not have anything for sale.)
