Annuity or Not
Is it good for your retirement income? Pro vs con?
When the market is up - bad
When the market is down - good
When you need cash under age 62 !/2 - bad
When you get sued - excellent
Growth - bad
Guaranteed - good
Some of the cons:
1) high fees/commissions
2) low ROI
4) poor liquidity
5) withdrawal limits
6) taxed as ordinary income vs a generally lower capital gains rate.
Pro: lifetime income.
Thanks. So if one dies early, they get all your money, no beneficiary?
2. Correct but there's a guarantee tradeoff
4. After 59 1/2 you can start withdrawing it
5. See 4
6. You're forgetting you also got to deduct your original investment from your income amount so that portion you didn't pay tax on
A typical buyer of an annuity would be a high earner who has maxed out all their other tax deductions, someone retiring who is wanting to lock in their monthly income or even someone who is in a field of work that has a propensity for lawsuits.
Not 100% guaranteed
Annuities aren't guaranteed. They say they are pretty close but none of them are guaranteed like FDIC, etc.
So in a normal market crash of 20-50% might be ok. If you have a market crash below that (like 1929 to 90% down) there is no guarantee of anything (except maybe FDIC, SIPC, etc govt related) and once insurance companies go under the govt doesn't always guarantee to back them up.
Annuities are using your investment to play the market and that's how they make money. If they lose their big bets and go broke, they can't pay you and will just file for bankruptcy.
Really large ones like AIG, etc. they might back up but you just never know.
We're in one of the biggest bubbles ever created and you might consider worst case scenarios that can include not getting your money back. Money market account right now is about your safest bet until things settle down. This is especially true if you are close to retirement. If you've made some gains I'd move to cash/money market and wait this out. No harm to get back in once this market comes back up. Watching your value drop by 50% is hard to do as you have to make 100% to get back to the previous peak. Might take 5-10 yrs or never if it is like the Japanese market at near 50% down after 30 years still.
Consider history in how over valued this market is and compare it to 1929 and 2000. You're not going to see this on CNBC or CNN. They're going to tell you to do nothing and watch your balance go down and you're dumb for getting out. The smart money has already bailed and large funds are dumping stocks every day. You want to take a risk that this time won't be like 29 or 2000? That's a big risk that you may not have the time to pay for.
I am close to my retirement, so is this a time to:
1. Stay where you are (current I have more stocks than bonds)
2. Move more index stocks to bonds
3. Move to annuities
I have an appointment with my financial advisor this Wednesday and just see what you all have.
Without splitting hairs Trophy is right - there are no 'guarantees'.
I do like his thinking on the market and have to agree w/ his assessment.
As far as seeing an advisor my only recommendation is to visit w/ at least 2. And the older they are the better. I've always thought your advisor should be in the same age bracket as yourself w/ some years experience of course.
This is not a time to waffle. Once you retire you pretty much commit to whatever financial decision you've laid. So visiting w/ a least 2 advisors certainly wouldn't hurt.
move to cash
I'm 45 and I moved from 100% stocks to 100% cash (money market and short term bond income fund). CNN, CNBC, and whoever else can call me whatever they want but I earned my money the hard way and I'm not going to watch it drop 50% or 60 or 90%. Done that already a few times and I don't like it so I've studied this problem a bit you could say.
You need to consider how likely this market is going to turn around quick to get back to the previous high of a week or two ago and what is the likelihood that this goes down 20-40% more than the already 11% down. High chance of lower lows here because historically we are due for a big drop whether people want to admit it or not all the flags are up and the smart money is already on the sidelines.
It is my opinion that it is going down to 40%+ and that's why I'm out personally. CNN and CNBC and the media does not want to create panic but the reality is the market is extremely overvalued similar to 1929 and 2000. Both times ended badly. 29 was worse taking about 30 years later to reach the high made in 1929. 2000 was better but nasdaq was down about 70%. In order to make back a 90% drop you've got to make about 9x your investment at the low. That is hard to do and why it took 30 yrs to recover.
This is a classic crash early stages after euphoria of a bull market ending.
You should read the newsletter from Lance Roberts. He's pretty much right on the money on this and has a radio show on 700AM 4-6pm week days which is really interesting especially right now with the crash.
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