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Tony Novak, CPA, MBA, MT
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The Case for Annuities (Part 1 of 2)
by Tony Novak, CPA, MBA, MT
, revised 11/29/2011
Annuities get a bad rap from financial writers, including myself. The financial magazines are loaded with articles that give reasons not to invest in annuities. But there are at least three good reasons to own an annuity. Investors should be have the facts to weight the plusses against the minuses to make smart investment decisions.
The three best reasons to own an annuity are:
1) Prevent outliving your income. Annuities provide the option of lifetime income for one or two persons. This is a significant risk for retirees today: 50% of those who reach age 65 will live to 85 and one in four couples at age 65 will have one or both survive to age 97. The risk of outliving our assets is significant and very scary.
2) Specialized pension plans. A special part of the tax code termed Section 412 allows businesses to bypass most of the expensive requirements of setting up and running a pension plan if the investments are held in an annuity. This is an attractive option to high income business owners who want to shelter tens of thousands of dollars each year from income taxes but do not want to pay the thousands of dollars required to start and run a pension plan.
3) Protection from market drops. Modern annuities allow investors to remain in the stock market but provide insurance if the market drops suddenly and sharply. This is attractive to young retirees who cash in stock options at high values and rollover 401(k) plan balances that have grown in recent years. Essentially this “locks in” high market current values. Some annuities even increase the guaranteed value when the market goes up.
Part 2 of this article deals with the cost of annuities. Sure they cost more than most other investments, but when is that cost justified and what is the real net rate of return to investors?
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