You likely can’t find a more hotly debated topic in the financial space than annuities.
Annuities garner a whole host of negative press, but are they really that bad, or could they be a good complement to your long-term investment plan?
Let’s take a closer look at what an annuity entails.
What’s An Annuity?
An annuity is a financial product purchased from an insurance company that provides a steady income stream either for life or a fixed amount of time. They are most prevalent in retirement planning as people use them to secure a steady cash flow.
Annuities can get complex, so it’s critical to understand what they are and how they work before you consider investing in them.
A financial strategy is not one-size-fits-all. Curating the right investment plan for you comes down to your goals, risk tolerance and capacity, cash flow needs, savings, investments, and a whole host of other factors.
Annuities aren’t appropriate for every physician, but there are circumstances where an annuity can provide the peace of mind a doctor is seeking concerning their retirement income strategy.
Two Annuity Categories
Annuities come in many shapes and sizes, some of which will be more beneficial to you than others. There are two general categories of annuities:
- Fixed annuity: These products offer a guaranteed rate of interest, usually around 4-5%.
- Variable annuities: These offer a variable rate of return depending on how the mutual fund investments perform.
Fixed annuities are the lower risk option of the two.
Here’s how the process works: the insurance company gives you a fixed interest rate on your investment over a set period. When the contract is over, you can terminate or renew your contract or transfer your money. Fixed annuities offer a guaranteed interest rate, so your return isn’t affected by market volatility.
Variable annuities are higher risk and also offer more opportunities for strong returns. These tax-deferred contracts invest in sub-accounts that are dependent on market health. A variable annuity can be a viable retirement savings vehicle for some if they’ve maxed out both their Roth or 401(k) contributions.
How Does It Work?
With annuities, you pay either a lump sum or set payments to the insurance company, which in turn, pays you in installments. Most annuity contributions aren’t tax-deductible, and distributions are often taxed as ordinary income. There are several other sub-categories of annuities:
When you receive payments:
- Immediate payment annuities: Annuitant will pay a lump sum and receive income immediately.
- Deferred income annuities: Annuitant will pay a lump sum and receive income at a future date set by you and the insurance company.
How long your payments last:
- Lifetime annuity: This option provides income for the remaining life of the annuitant.
- Fixed period annuity: This option pays an income over a set period of time.
Let’s dive in a bit deeper with a real-life example. We had a Vestia client come to us in the middle of 2019 nearing retirement and fearful of losing money in the market. After hearing their concerns and performing a portfolio analysis, we set up an annuity structured with a future income guarantee to add a stability component to their portfolio. It also granted peace of mind that a portion of their retirement spending was “safe.”
Fast forward to March 2020, when we saw the significant drop in the market. We met with that client to review their plan, and they were so thankful knowing that the annuity protection was in place. It made them feel much more confident staying on their charted trajectory and fighting the temptation to cash out of the market! While it may not be the best option for everyone, it certainly worked in this case.
The Benefits for Doctors
The most valuable benefit with annuities is the guaranteed income. There aren’t too many “guaranteed” investments in a retirement plan, especially with the decline of pension plans. Pensions exist in a scant number of hospital systems today, and Social Security can’t cover everything.
Other benefits of annuities include:
- Limited market risk
- Tax-deferred growth with no contribution limits
- Ability to add on additional riders (long-term care insurance, future income guarantees, etc.)
- Great way to diversify income and assets
- Another way to round out an estate plan (name a beneficiary and the fund’s transfer to them upon your death)
For doctors especially, the tax-deferred growth within annuities is crucial, especially if there are any future tax increases.
What Doctors Should Look Out For
Unfortunately, it’s not all sunshine and rainbows. There are some drawbacks of annuities that doctors should be aware of:
- High fees and expense
- Surrender charges (charges for selling the annuity if you change your mind or cash out early)
- Complicated products
Despite higher fees and surrender charges, annuities may still make sense to be part of a physician’s retirement portfolio. It’s all about what the benefit of these annuities is worth to you.
So, Are Annuities Good or Bad?
The answer is neither good nor bad. The better approach is the one that fits into your lifestyle and goals.
Annuities for physicians serve an integral role in some portfolios, but they aren’t the perfect product for everyone. If you need help deciding if an annuity is right for your retirement portfolio, get in touch with our team.
Disclosures
Investment advisory services offered through Vestia Personal Wealth Advisors, Vestia Retirement Plan Consultants, and Vestia Advisors, LLC. Securities offered through Ausdal Financial Partners, Inc., 5187 Utica Ridge Rd, Davenport, IA. 52807 (563)326-2064. Member FINRA/SIPC. Vestia Personal Wealth Advisors, Vestia Retirement Plan Consultants, Vestia Advisors, LLC, and Ausdal Financial Partners, Inc. are independently owned and operated.
This material is intended for informational purposes only. It should not be construed as legal or tax advice and is not intended to replace the advice of a qualified attorney or tax advisor. This information is not an offer or a solicitation to buy or sell securities. The information contained may have been compiled from third-party sources and is believed to be reliable.
