Don't Overlook Annuities in Your Retirement Planning

There was a time, which many of us remember well, when you could pick investments by throwing darts at the daily stock pages and make 18% on your money. Those days are gone, and good riddance. Why? Not because the return wasn't good, of course, but because the environment (conformist, fad-driven, one-size-fits-all) led to a generation of financial know-nothings. It is much better that people be careful, studious even, about their investment choices. When the economy is shaky, people tend to wake from their slumber. Now, a return to a thriving economy would be nice, but if you needed the recession to get serious about your retirement planning, so be it. Fact is, you will now be ready for the return of economic good times because you will know what to do (and what not to do, which may be even more important).

One thing you never want to do, in any financial plan, is to ignore good options and miss good opportunities. This is so important that economists have a term for the negative effect of missing the boat: opportunity cost. If you take your money and stick it in a 2% passbook savings account, when you could invest it safely in something paying three times that, your opportunity cost is significant. Therefore, when thinking about retirement, you have to do more than consider mutual funds and Individual Retirement Accounts. There is insurance to consider (and many kinds), there is real estate, there are good trust structures and, yes, there are solid annuities you can get into, as well. For your own good, don't overlook annuities in your retirement planning.

Fixed (or fixed return) annuities

The name says it all. These annuities pay out a fixed rate of return, which is determined at the point of purchase and lasts a specified length of time (known as the surrender period). The rate will not change, and in volatile markets that can be a very good thing. However, once in a while, when other interest rates go sky-high, you may rue the rate you locked in. This is why you need to take the long view, as they say, and understand what it is you are accomplishing with the fixed return annuity. You are buying security, as a matter of fact, and you will be able to manage your overall finances and retirement portfolio with much greater flexibility when you have this kind of annuity. There will be no mysteries with it.

There are other advantages to fixed return annuities. You are subject to no tax while the annuity remains intact, and only incur taxes at the end of its term. This means your savings with the annuity are tax-deferred, and during the surrender period the funds that might have gone to pay taxes are instead earning interest. This is a tremendously important point to remember about annuities. Death benefits are also a part of the fixed return model. If you die before the annuity is surrendered, your survivors inherit it along with the accumulated savings and interest.

Variable annuities

There are many more similarities than differences between fixed and variable annuities, but those differences are serious ones. Variable annuities can include tax-deferral and death benefits, too, and are marketed and administered by the same kinds of organizations that deal in fixed return annuities. Some people will actually have both kinds, and this can be appropriate in a variety of situations, possibly yours. But there is one major difference that makes a variable annuity an entirely different investment.

The word variable applies to the return, which can differ because of the fact that you control where the money is invested. Because you have this control, you can take greater risks than another person might take, which means you could possibly make greater returns, too. It comes down to what kind of person you are, what kind of goals you have, what kind of retirement you foresee and other variables, including your financial acumen and your investment expertise. You do not have to be a star day trader, but you will need to be more financial savvy than most people if you are going to add a variable annuity to your self-managed retirement portfolio.
Bottom line

If you are a conservative investor and do not want to manage your portfolio, the fixed return annuity is probably best. If you are a bit of a risk taker, and do want to manage your investments proactively, you are a likely candidate for a variable annuity. Either way, it really does help to avail yourself of the expertise and, more importantly, the objectivity and perspective of an investment advisor when you are considering an annuity for your retirement plan. It could be just what you need, now and later.