“In general, an annuity is like any other investment option,” Ryan Peterson tells me. “It’s a tool, and you need to evaluate your situation and find the best tool to help you. An annuity isn’t appropriate for everyone.”
Peterson is the founder and President of Wisdom & Wealth Solutions, an independent investment advisory firm. He has years of experience as a financial planner and investment advisor, and works closely with clients to help them fund their futures. One of the products he feels can be a good fit for many investors is the indexed annuity.
“Indexed annuities have nice features,” Peterson points out. “You have the opportunity to get some appreciation, since the annuity has growth potential related to the index it’s related to. However, you also don’t have to worry about losing money. Many of these annuities guaranty some rate of return, so that even if the stock index has a down year, you are protected from losing money.”
Using an Indexed Annuity as a Pension
Peterson points out that an indexed annuity can be used as a pension. “Gone are the days when you receive fixed income for life because of a pension,” he says. Instead, the indexed annuity can act as a pension, providing guaranteed income for the rest of your life. And, with the right annuity, it can be guaranteed for your spouse as well.
“The fixed index annuity can be a great tool for those who want to have a guaranteed income once they retire, or sell their business. There is some growth, no current taxable income. If you aren’t spending the money, you shouldn’t be paying taxes. Many former business owners and employees can take the money sitting in a tax-advantaged retirement account and use it to buy an annuity,” Peterson explains.
Peterson does caution that annuities can cause estate planning issues down the road. “There are insurance products that can be valuable in estate planning because of the tax-free benefit. Annuities do not all into this category. They work well for some people when making the transition into retirement, but they can cause some problems from an estate planning standpoint.”
How to Choose a Fixed Index Annuity
Annuities have gotten a bad rap in recent years because of some of the complexities involved. “There are hundreds of annuity contracts out there,” Peterson says. “Some are so complicated that I have trouble understanding them, and I’ve been in the business for years. I typically stay away from the complex annuities, and look at the simpler options.”
Once again, one of the the basic rules of investing holds true: If you don’t understand it, don’t invest. This is true of annuities. Make sure you understand the terms of the annuity, whether it’s a fixed annuity or a variable annuity, and how the indexed annuity works. on your behalf.
Peterson also recommends that you work with someone who is independent of conflicts of interest. “You want an independent advisor who can help you evaluate your options, and who isn’t beholden to any specific investment product.”
In the end, an indexed annuity can help those who are well-suited for such an investment. They are gaining in popularity among those who have been burned by recent stock market drops, and for someone looking for a steady lifelong income in retirement, this might not be a bad option.