How do you compare the benefits and features of each type of annuity?

Generally speaking, Baby Boomers are independent thinkers. They have always been unwilling to accept old-guard thinking that no longer applies to them, or to the current world. Suddenly, in the past few years, annuities are rising in demand as Baby Boomers retire.


After seeing their 401(k)s turn into “201(k)s twice in the past fifteen years, they simply are saying “enough already.” The market is too high, interest rates are too low, and they are discovering that the key to a happy retirement is not necessarily a bigger pile of money (sitting at risk in the market), it is steady, reliable income that can never be outlived. Only annuities from legal reserve life insurance companies, regulated and audited in all fifty states, can provide safe secure annuities to the public. Each company is licensed, regulated, and audited in each state.

Without the benefit of steady reliable income that is not affected by markets, there is no such thing as a stress-free retirement. Logical people now want more: more safety, more security, more income, and more non-correlated diversification from the stocks and real estate they own in other financial “buckets.”

Once upon a time, bonds could perform the safe income function. They paid six to ten percent, guaranteed by the government. That was back in the twentieth century when all the textbooks were written about how to plan retirement. John Bogle of Vanguard had a standing piece of advice for retirees: “Your age in bonds.” He was referring to what is known as the “Rule of 100”, which works like this: Subtract your age from the number 100. The remaining number is the maximum percent that a moderate to conservative investor should keep fully invested in stocks. Back in the mid to late 20th Century, the standard retirement portfolio was known as the “60-40” portfolio–sixty percent bonds, forty percent stocks. Back then, that particular portfolio mix was effective. Today, U.S. treasury’s are paying from 1.5% to 2.2% in the five to ten year maturity range. Logical people know that a person can’t live on those low yields.

What is an annuity?

Enter annuities, which are a combination of both investment and insurance. Annuities are built for retirement specifically. They are not for pure accumulation at younger ages. They are for fixed income and preservation to replace income once a person retires. They pay income for life based not just on interest rates, but also on a person’s age. The older you are, the more an annuity will pay you. As people retire without pensions or without enough of a pension, annuities are the logical choice.

Annuities have rapidly evolved in the past five to ten years and have become Baby-Boomer-friendly. The insurance company does not keep your money when you die, there is ample liquidity, and you can realize a lifetime income without “annuitizing” (turning your lump sum into income only). You can maintain control over your lump sum, and every penny you don’t spend passes to your beneficiaries with no penalty or charge. An income of five to nine percent can be realized from a deferred index annuity, depending on a person’s age and deferral period.

Comparing Annuities: The Basics

There are four types of annuities: immediate, variable, fixed, and fixed index. It doesn’t take long to understand the difference, but unless you take a little time to gather that info, information on annuities may not be clear to you. Journalists who write articles for the internet are often unclear on the differences, and therefore write information that is flawed from the outset. Brokers and investment managers, scurrying to respond to their clients’ proclamation that they want to get an annuity for income, often read these articles or the old textbooks as their complete body of knowledge on the subject. Here is a piece of advice: never ask a Ford salesman what they think about Chevy’s.

Annuities Are Not Traded On An Exchange

Annuities are not traded like stocks, bonds, and ETFs, so they don’t appear on exchanges. This makes them a bit more difficult to compare than ETFs or mutual funds. That doesn’t mean you should quit before you start. A great deal of accurate information is available, “>if you know where to look and use your own brain to make your choice.

Many investors have gotten used to being able to compare the more than 5,000 stocks and the 15,000+ mutual funds and ETFs by going to sources like Yahoo and Morningstar.

Key Point: With immediate, fixed, and fixed index annuities, your money is never invested directly into the market. The licensed life insurance company keeps your capital in safe accounts, never exposing your money to the stock market. Variable annuities, on the other hand, are the only form of annuity where your principal is at risk and you must pay fees for management. They are the one type of annuity where your money is placed into mutual funds. All other forms of annuities–immediate, fixed, and fixed index–have zero fees for management and protect your principal against loss due to market fluctuations.

Variable Annuity Cons

Unfortunately, with a variable annuity, the owner is subjected to heavy fees, yet with no guarantee of the principal. The saving grace can be the optional income rider, if selected, which guarantees income if the principal goes away. The typical fee for a variable annuity income rider is 1.2% to 1.5% annually. Altogether, the owner must pay up to two or three percent annually in management and mortality fees. The reason they don’t appear on exchanges is that they are highly regulated insurance contracts, not just speculative investments. Annuities guarantee important benefits. Mutual funds do not. Annuities must be offered through appropriately licensed professionals who are regulated in each state and responsible for the advice they give. Each client must meet suitability standards.

That’s why its imperative to work with a fiduciary advisor who is skilled and deep on knowledge regarding all four kinds of annuities: immediate, variable, fixed, and fixed index. They can perform comparisons for you, and help you set up a lifetime income strategy. The trouble is that not all advisors keep track of more than a handful of annuities or are not fiduciaries. For information on the fundamentals of annuities you can begin here. From there, keep an open mind and realize that for the 21st Century, you need 21st Century solutions, suited to the fact that you need income and security, not just growth at this stage of your life.

A Kiplinger contributor, Steve Jurich heads IQ Wealth Management in Scottsdale, Arizona, a registered investment advisor. He is a Certified Annuity Specialist and a Certified Income Specialist and the author of the Amazon best seller, Smart Is The New Rich. You can hear his daily radio program, Mastering Money, broadcast on Money Radio in Phoenix (1510AM, 105.3FM) or choose from his podcasts

©Copyright by IQ Wealth Management 2017. All rights reserved.