So, I titled this as “buyer beware” as Annuities are an animal that you need to fully understand before purchasing.  They always sound great on the surface.  Especially in times of market turbulence the sales pitch is alluring “capture some of the market upside with no downside risk”.  That pitch you hear for many of the index annuity products sounds awesome, the problem is I rarely see one that delivers.  Generally what I see is a product that has little to no returns with a sizeable surrender charge so the client is stuck in them for years.  As a fiduciary advisor this rubs me wrong.  The only person that wins is the advisor that just collected a big commission to sell it.

Let’s be honest, an annuity is an insurance company product and it is sold.  I really don’t consider it an investment.  If annuities were that great would you really have to lock a client into a 20 year surrender charge to get out?  Yes, I just saw one of these sold by a well known Atlanta area “advisor” that gets a fair amount of media attention.  The client is stuck, they can’t get out without a double digit surrender fee.

So are they ever justified?

With that said, there are products out there that can supplement retirement income and provide a respectable conservative rate or return without locking a client up for decades.  And, believe it or not (as a non annuity advisor) I have actually seen cases where an annuity can be a tool in your retirement strategy.  However, about 75% of  the time I find that the annuity is nothing but a commission generator for the sales person (financial advisor) and does nothing to help the clients retirement or financial well being.

What to look for?

  • #1 is the surrender schedule:  how long are you locked up if you want out?
  • #2 fee structure:  what is the commission and internal fees?
  • #3 problem you are solving:  What does this annuity do that you can’t do in a 5% yield T Bill?  Better upside?  Longevity protection?
  • #4 How does it fit in your overall retirement plan?  If you can’t answer how this “financial tool” is supposed to help, then don’t buy it.
  • #5 please don’t go all in:  maybe an annuity can work for some of your savings but please don’t ever lock up all your retirement assets in one of these products.

I’m not an annuity hater, I am however the guy that people call for help when they get in these products and want to know what to do.  Annuities are financial tools that may or may not be right for you.  However do your due diligence before purchasing.

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James A. Daniel

James A. Daniel - Financial Planner


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