Ortiz Method #9: Annuities

15 Apr Ortiz Method #9: Annuities

When someone googles ‘annuities’ the search results always seem to remind one of the famed Clint Eastwood Western films, ‘The Good, The Bad, and The Ugly’. Every other link on the first page ranges from annuities giving you the retirement of your dreams, to annuities being the death sentence of your financial freedom. Some financial professionals make a living off of them, while others make a living off of demonizing them. Looking at all of the different headlines can be confusing, and reading every article on them is just flat out time-consuming. At the end of the day, the choice of whether or not you should put your money in an annuity depends on a few things; what kind of annuity it is, what your financial goals are, and how well this annuity will fit into your portfolio to accelerate the realization of those goals. In this article, we are going to cover the basics of annuities as far as how they work, what kinds there are, and how this information applies to you.

Broken down, there are three main attributes investors look for in a product when considering it in their portfolio, growth, liquidity, and security. An annuity is an investment issued by an insurance company designed to help protect you from the risk of outliving your income. So to put it simply, you sacrifice liquidity (in the form of a lump sum payment), for moderate growth and guaranteed income. That’s the basics of annuities but there are a quite a bit of different annuities out there. Fortunately, they can be broken down into just a few different types.

Generally speaking, there are three types of annuities; fixed, variable, or indexed. Fixed annuities are the most straightforward of the bunch. In fact, they are not too different from CDs but with better bang for the buck. These can be broken down into immediate or deferred annuities. Immediate annuities are akin to life insurance policies. Except you don’t pay premiums to the insurer until a lump sum upon death, the investor pays the lump sum in return for regular payments until death or a specific period of time. Immediate annuities are a lifesaver if you are about to retire and need to make sure that the bills are paid every month, no matter what. With immediate annuities, you begin receiving your payments within 1-12 months after the receipt of the investment. With these types of fixed annuities, you often do not have any access to your principle once you have committed to a stream of income. But the payments you receive include principal as well as interest, not to mention they offer favorable tax treatment. However, there are two types of fixed annuities.

The second is a deferred annuity. Deferred annuities, otherwise known as fixed-indexed annuities, do not begin payment witing a year (such as immediate annuities), but instead offer market participation as well. These types of annuities grow based on the return of a certain market index. You do get to fully participate in market gains, but on the other hand, you are free from full participation in market losses as your investment is still protected. This is ideal for investors that want to take part in the stock market without having to worry about losing their initial investment.

Variable annuities still have the same purpose as fixed annuities, to provide a dependable income. Variable annuities simply accomplish this goal from a different approach. There are two phases with variable annuities, the first being the accumulation phase. In this first phase, you choose from a market of subaccounts that will determine your annuities value. ‘Subaccounts’ is another term for mutual funds, which is used when dealing with annuities. After selecting your subaccount (mutual fund), you begin paying into the variable annuity. Another advantage of variable annuities is that all of your money is tax-deferred until you begin your withdrawals. Also, there is no limit to the amount of tax-deferred money you can put into the variable annuity during the accumulation phase. I know what you might be thinking, what if the mutual fund performs poorly? Well, a rider can be purchased to lock in an income stream regardless of market performance. This is another way these products focus on safety over growth and liquidity.

So now comes the most important part, how all of this information applies to you. For some people, the risk is simply not an option and they choose to make annuities their main source of income. One thing you need to be careful of if this is an option you are leaning towards is fees. If you require money fast for an emergency bill or unexpected health costs, you are going to have to pay a hefty fee to gain access to your money. And in many cases, you do not even have this option. So make sure you have an emergency fund or plan if you want an annuity to be your main source of income. For those who seek a more diversified portfolio, annuities can lock up too much of your funds. But they are a great way of maintaining a base income to cover your expenses so that you are free to invest your money without worrying about how you are going to pay your most important expense(s). Either way, make sure you choose carefully when it comes to annuities as they are a long-term or lifetime investment.

If you are considering annuities in your portfolio, have concerns about an existing annuity, or just have questions, please contact us. We here at Ortiz World Wealth would love to walk you through your situation step by step because nobodies’ financial situation is the same. You can reach us by phone toll-free at 1 (800) 584-1902 to schedule a free initial consultation. Don’t go through life with questions about your finances, get answers. Remember, Plan Smarter Live Better.


Photography Credits:

Featured Image by Philipp Birmes from Pexels

Photo 1 (top) by Cytonn Photography from Pexels

Photo 2 (bottom) by Adrianna Calvo from Pexels

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