The stock market continues to swing violently. Despite last week’s surge, the S&P 500 is still down 18% for the year, and investors remain nervous. The US Index of Consumer Sentiment recently touched 50, a 72-year low. What should you do?
Investors sell stocks and park their money in a money market fund or T-Bills when anxiety is high. A T-Bill can provide short-term relief, but it’s a poor investment to create wealth. The 1-month US T-Bill currently yields 1.19%, so it will take more than 60 years to double your money!
An annuity may provide relief to nervous investors because it offers guarantees not found in traditional investments like stocks, bonds, or mutual funds. An annuity is similar to riding a bike with training wheels or bowling with bumpers.
There are two types of annuities – fixed and variable. A fixed annuity will pay a specific rate that is guaranteed, similar to a US Treasury bond. A fixed annuity can be immediate or deferred. If you buy an immediate annuity, you will start to receive monthly income soon after your initial investment. A deferred annuity delays your payout to the future. For example, if you contribute today, you can defer your income distributions until you’re ready to retire.
A variable annuity invests in stocks and bonds. The return is variable because no one knows how stocks or bonds will perform over time. However, an insurance company can guarantee your initial investment. If you invest $100,000, the insurance company will guarantee your principal. It also offers other benefits, like an annual step-up in basis or a minimum return. For example, the insurance company can lock in higher values if it rises, and they can guarantee your investment if it increases from $100,000 to $105,000.
Annuities offer dozens of riders, and some popular ones include a guaranteed minimum withdrawal benefit, cost of living increase, long-term care rider, and a disability rider. These features can enhance your benefits. The best part, in my opinion, is to annuitize your investment to provide income for life. Your income stream will last a lifetime, regardless of how long you live. It can offset longevity risk and eliminate worry if you’re concerned about running out of money later in life.
However, annuities and insurance contracts are not cheap, and you’ll pay dearly to protect your assets. It’s not uncommon to pay more than 3% to buy an annuity, and most have significant deferred sales charges if you withdrawal your money before the contract policy terminates. A deferred sales charge could last several years. For example, if you sell your annuity during the first year, you may incur a 10% fee. A deferred sales charge typically declines by 1% per year before you can liquidate your holdings without fees. By comparison, the Vanguard 500 Index Fund expense ratio is 0.04%, and there is no commission to buy or sell the fund.
Brokers love to sell annuities because they pay sizeable commissions. If you invest $100,000, a broker may receive a commission of $5,000 or more. Have you ever received an invitation to a retirement dinner at a nice steakhouse? Brokers love these events because they know a handful of prospects will buy an annuity, and they will reap a massive payday.
Insurance companies now offer annuities without commissions for Registered Investment Advisors (RIAs) and their clients. These annuities appeal to fiduciaries because the fees are lower, and clients can buy or sell them without high expenses.
An index fund is like a scoop of vanilla ice cream, and an annuity is similar to a sundae with all the toppings. And, if you order a sundae with sprinkles, nuts, gummy bears, chocolate sauce, marshmallows, M&M’s, Oreos, etc., it will cost a lot of money!
I’m not a huge fan of annuities, but they can offer a purpose for investors nervous about the stock market. A variable annuity is a better long-term investment option than a 1-month T-Bill.
If you want extra support for your portfolio, consider an annuity.
I advise you to go on living solely to enrage those who are paying your annuities. It is the only pleasure I have left. ~ Voltaire
June 25, 2022
Bill Parrott, CFP®, is the President and CEO of Parrott Wealth Management, located in Austin, Texas. Parrott Wealth Management is a fee-only, fiduciary, registered investment advisor firm. Our goal is to remove complexity, confusion, and worry from the investment and financial planning process so you can pursue a life of purpose. Our firm does not have an asset or fee minimum, and we work with anybody who needs financial help regardless of age, income, or asset level. PWM’s custodian is TD Ameritrade, and our annual fee starts at .5% of your assets and drops depending on the level of your assets. We have waived our financial planning fee for the remainder of the year, so your cost is $0.00.
Note: Investments are not guaranteed and do involve risk. Your returns may differ from those posted in this blog. PWM is not a tax advisor, nor do we give tax advice. Please consult your tax advisor for items that are specific to your situation. Options involve risk and aren’t suitable for every investor.