I’ve written about “tools” in previous articles.  June happens to be “annuity awareness month” in our industry, so I thought I would cast a spotlight on them within this article.  Annuities are simply tools that offer a few distinctive and unique benefits.  Primarily, I’ve made use of annuities within client plans to the extent we’ve needed durable income.  “Durable” implies that you can neither outlive the income, nor can the market take it away.

Only an annuity can provide such an income to compliment a pension, or Social Security.  Furthermore, annuities guarantee the amount that a surviving beneficiary will receive should the account owner pass away.  If the task at hand calls for the construction of durable income, with a guaranteed death benefit to beneficiaries, then the annuity tool is the most suitable for that application.

Unfortunately, annuities have been the subject of bad press, and castigated as being exorbitantly expensive and not a potential venue for attractive return.  This is a myth.  There are different types of annuities.  A variable annuity allows for the investment of money within professionally managed sub accounts, and the potential for growth is only limited by the investor’s allocation, and tolerance for taking market risk.  Fixed annuities offer a stipulated rate of interest, and a guarantee of principal. Equity indexed annuities also offer a guarantee of principal, and a potentially higher rate of long term interest than a traditional fixed interest annuity.

Also, not all annuities are cast from the same mold, and expenses therefore can vary widely.  Yes, there are some expensive contracts out there, but there are also some very low cost contracts as well.  Remember the driving premise of utility though.  If you need what the annuity provides, then there will be an expense associated with that tool.  If you don’t need what the annuity provides, then there are other tools with their own expense propositions to consider.  Just because one tool is less expensive than another however, doesn’t mean that it’s a better or more suitable alternative.  A screwdriver may be less expensive than a hammer, but if your task at hand is the driving of a nail, then the screwdriver isn’t going to be of much benefit, in spite of its lower cost.

In my opinion, there is a tremendous amount of misinformation about annuities in the general media, and frankly, disinformation as well.  Pundits have suggested that annuities are complex, hard to understand, voluminous, and only of benefit to the person selling them. I would encourage anyone to consider the source.  If the source of the information has a negative bias toward annuities, or if they claim to not even offer such as an investment alternative, then I would question the value of their opinion about a tool they don’t even have, and claim to never use.

There is nothing inherently wrong with the tool itself.  If someone isn’t properly trained on how to use the tool, then yes, it can seem overwhelming or complex.  That’s my job though, and it’s where competency and knowledge become critical to the success of a client’s retirement plan.  Selling a hammer doesn’t “only” benefit the salesperson if such is the most suitable tool for driving your nail.  Sensationalism sound bites like that are useless.

When you hear the word “annuity”, don’t cringe.  Don’t allow yourself to be swayed by anti annuity negative bias.  Don’t fall for the suggestion that “all hammers are bad”, because they’re not.  Tools aren’t bad, they’re only misused.  Do your own research.  Ask pointed questions.  Take the time to fully understand what annuities are designed to do, and what they’re not designed to do.  If you don’t need the tool, then don’t use it.  Lastly, work with a financial professional who has a broad base of knowledge, and who can be your fiduciary in helping you cipher through such options.