Should YOU Hate Annuities?

When I was a kid, my father taught me to play chess.

He’s a doctor, a master at thinking ahead, and he wanted me to learn that kind of discipline.

That’s what chess is all about — plotting and thinking three, four or five moves ahead. Now, as an adult, that’s how my brain is wired. It’s why I like working with people to plan their retirement incomes.

I see clients all the time who are worried that the money they’ve saved and invested won’t last their lifetimes. They might have 401(k)s or some other retirement accounts, plus Social Security, but they don’t know if that will be enough.

The good old days of pensions

Back in the day, people had pensions through their employers — monthly income they knew they could count on when they no longer earned a paycheck. Pensions weren’t without problems. You didn’t have control over how the money was invested; and if you passed away prematurely, the money might not be transferrable to your children. However, the guaranteed income from a pension gave retirees some much-needed peace of mind.

Unfortunately, pensions are disappearing. Most employers aren’t providing them anymore, and many are offering lump-sum buyouts. Baby Boomers and the generations behind them are searching for some kind of replacement — something that will help them find confidence in their finances, with the same kind of protection their parents’ pensions gave them.

That’s why the topic of annuities comes up, and it’s often an unpleasant conversation.

Annuities take some heat

Annuities aren’t perfect, as they aren’t for everyone. They are a constant target for criticism from financial columnists and others in the media.

Individuals seem to pay attention to those opinions, and they are careful to ask questions. They are understandably nervous about annuities after reading those reports.

“Reid,” they say. “Ken Fisher hates annuities! He actually wrote a column titled ‘Why I Hate Annuities.’ He screams it in his ads. Fisher is Forbes’ longest-running columnist, an author and a billionaire investment analyst; so why would I fall for what he calls ‘the cigarettes of the investment world’?”

Why indeed.

I don’t disagree with Fisher, but as many critics fail to point out, annuities have both upsides and downsides. As he says, the contracts can be “huge, obtuse and confusing.” The fees are sometimes high (they can exceed 4% a year), there can be limits on the income benefits and how income credits are calculated. There may be rider charges, and surrender charges if the holder decides he wants out before the term is up. I’ve seen policies that exceed 10 years. It can be hard for consumers to imagine leaving their money in that policy for a decade and hoping it does well or having limited access to those funds. That’s why it is vital for consumers to find a financial professional who can help determine whether an annuity is appropriate for them and, if so, find the appropriate one.

But annuities can have a good side, too

So, why would anyone consider buying one of these financial vehicles? Why would retirees go for an annuity, when they can easily open a brokerage account that gives them more control and unlimited access to their money with potentially lower fees?

My answer: Annuities can be an appropriate piece of an income plan for some retirees, as they create the reliable, structured income stream that people miss in pensions. Without a pension, an annuity is a natural consideration as a substitute, as long as people understand their downsides.

In addition, annuities can help people become disciplined investors.

Too many people let their emotions guide their investment decisions. If the markets go down, they panic and want to sell because they worry their lifestyles — their retirement dreams — will be damaged if they continue to lose money. On the flip side, if the markets are going up, it defeats the purpose of growth if they get greedy and sell.

If they have an annuity, they have a backup in good times and in bad. It gives their plan more diversification and helps them to keep emotions out of their financial decisions as an annuity is a long-term financial vehicle.

The bottom line

An annuity helps creates a balanced approach, and we know that balance works in everyday life. That’s true with eating, drinking and, yes, even income planning.

I am absolutely not saying that you should go out and buy just any annuity. I repeat: They. Are. Not. For. Everyone. There are different kinds, and those differences can be complex.

But if you’re working with a qualified professional, he or she can take a look at your entire situation — what you have and what you don’t, your risk tolerance, your time horizon and your goals — and design a plan that may or may not include an annuity.

If you’re a planner — if you’re thinking five moves ahead and looking for a way to remove potential threats to your golden years — don’t say no to annuities until you’ve had that talk.

Kim Franke-Folstad contributed to this article.