Income, Growth or Both?

Annuities are often touted by insurance agents as the “be all, end all” investment. Want to grow your money? Great! You can invest in the stock and bond markets or even various alternative asset classes, through variable annuities, if you are willing to take risks for higher potential growth. Don’t want to risk losing money in the markets, but not happy with CD rates? No problem. You can generally earn higher interest in a fixed-rate annuity, plus the interest earned in any annuity is tax-deferred. Or you can link your potential interest to various stock, bond or even commodity indexes (without risk of losing money if the markets go against you) in an index annuity. Annuities can grow your money, either at a fixed rate of interest; with higher growth potential and risk of loss in the markets; or by linking to market indexes where you trade some of the upside potential for downside protection against loss. Either way, you can grow your money in an annuity, and at some point either move all of the money to another account without penalty or restriction, leave it to beneficiaries and/or take income from the annuity.

So that’s growth; what about the income? Annuities are about income, right? They certainly can be. Imagine going to your bank, or perhaps to your investment brokerage or mutual fund with this proposition: “Mr. Banker/Broker/Mutual Fund, I would like to deposit $100,000 into an account at your firm. My plan is to grow the money for a while and then start taking income. I understand that you will earn fees along the way. What I want in exchange is this: when I start taking income, should my account balance ever go to $0.00, I want you to keep paying me for as long as I live.”  What do you suppose the Banker/Broker/Mutual Fund will say? Of course their answer would be “no”. This is because annuities, whether fixed, variable or indexed, are the only financial vehicles that can guarantee you income that you cannot outlive. And today’s annuities are much more flexible than they used to be when it comes to providing lifetime income.

It used to be that in order to get the guarantee of lifetime income (subject to the claims paying ability of the issuing insurance company) you had to forfeit control of your principal by “annuitizing” the annuity. This option is still available, and you can direct that the remaining principal be paid to beneficiaries if you don’t live long enough to get your original money out, but you cannot ever change the terms or access the principal once you elect to annuitize for your desired income payout: that decision is irrevocable. But today’s modern annuities offer new lifetime income options where the income is taken as withdrawals through what are called “income riders”. This means that you still control the principal, subject to the terms of the annuity, should you ever need more money or should you want to close the account and move the money altogether (this would of course affect the future income). It also means that you can earn very attractive and even guaranteed rates of interest during the “growth” period, until you start taking income. There are significant differences between fixed, indexed and variable annuities in how these income riders work, in particular the rates of guaranteed income that they will deliver, as I will discuss in another column.

While annuities may not be the “perfect investment”, many people are using them to create their own “private pension”. Today’s modern annuities can deliver income, growth or both, that you can count on like never before.