Page 20 - Investment Advisor September 2022

ANNUITY & RETIREMENT PLANNING

By Allison Kade

A Quick Look at Annuity Investing in 2022

There’s a lot to keep up with when it comes to how annuities work, their
pros and cons, and selecting the type of annuity that’s best for a client.

f your clients are looking for ways
to create an income stream for
Iretirement, there’s a good chance
you’ve at least thought about annuities.
There are a lot of benefits to annuities,
most notably that they can create a
guaranteed income stream for retirees.
That said, there are nuances to consider,
such as complicated fee structures and
tax implications.
The main reasons someone might get
an annuity include:
• Steady income: Annuities can serve
as supplemental retirement income,
especially for people who may not
have saved enough to cover all of
their needs.
• Deferred taxes: In the accumula-
tion phase, clients won’t owe taxes,
even while their nest egg grows.
They will pay taxes only when they
begin withdrawing the money.
• Predictable returns: With a fixed
annuity, clients are guaranteed not
to lose money. Fixed annuities typ-
ically guarantee that the annuity These can sometimes exceed 1% of performance of investing in a simi-
holder will earn at least a certain the account’s value. Then there are lar mutual fund directly.
percentage of their principal invest- the expense ratios for the invest- • They may lead to higher taxes: A
ment as earnings. ment management of annuities tied long-term market investment faces
• Protection in case of death: to market performance. Fixed and the long-term capital gains tax rate
Variable annuities often include indexed annuities tend to be less when you make a withdrawal. But
a death benefit; the client nomi- pricey, though most annuities have withdrawals from an annuity are
nates someone to receive money surrender charges, which are added taxed at the regular income tax rate,
if they were to die. In many cases, fees if you withdraw assets or cancel which in many cases is higher than
the death benefit is equal to the the contract early. the capital gains rate.
amount a person paid into the • They might underperform the • They are illiquid: During the “sur-
annuity, regardless of how their broader market: Many annuities render period,” you’d face a penalty
investments perform. have a participation rate; if your if you touched any of the money.
Annuities can be the right fit for participation rate is 80%, then In some cases this can last many
many people, but there are some draw- you’ll receive only 80% of the years, which is why annuities may
backs to consider: investment growth. If the invest- not be right for clients who are
• They can be expensive: Annuities ment grows massively, you can still younger or have more short-term Adobe Stock
sometimes come with hefty fees. notch large gains, but you’ll lag the liquidity needs.

16 INVESTMENT ADVISOR SEPTEMBER 2022 | ThinkAdvisor.com