I’ve always been a bit leery of annuities. After all, you hear all sorts of bad things about them. They can be complex, and the horror stories about how ordinary folks find themselves messed over because of annuities are numerous. However, Pete D’Arruda, host of The Financial Safari, and a registered financial consultant and investment advisor with Capital Financial Advisory Group, says that you can use annuities to your advantage. But you have to get the right annuity in order for it to work.
“The problem with annuities,” D’Arruda tells me, “is that there are too many out there. When people hear the word ‘annuity’, they automatically assume it’s the bad kind of annuity. The variable annuity got a hold of it, and gave it a bad name.” He goes on to point out that our grandparents had pensions, but our parents have 401ks. “The 401k doesn’t offer a lifetime guarantee like a pension. An annuity, though, can act as your own pension. You can get fixed annuities with income riders so your money is not at risk.”
D’Arruda says that it is possible to get a fixed annuity that guarantees a certain interest rate, and you can choose to get one with a certain pay out after a certain period of time. The interest yield isn’t as high with a fixed annuity, but you receive regular income, and that can be used to pay everyday expenses while the other part of your portfolio continues to grow. “A fixed annuity with an income rider enables us to put a floor of what we know you’re going to get. Just set up the annuity so you get what you need. Then you can take risks with other money knowing that your ‘pension’ is still safe.”
The key is to make a plan, and to choose a simple annuity that doesn’t have a lot of fees and expenses. There will always be a small charge, but it doesn’t have to be complicated. “We identified a few companies with solid offerings in terms of these annuities,” D’Arruda says. “All of our recommendations meet legal reserves with states so that there is insurance designed to protect your money.”
In the end, D’Arruda insists, it’s about setting up your annuity right. Be careful, and set up a good annuity, and it could provide you with an income stream to cover your expenses, while still allowing you to enjoy some growth in other areas of your portfolio.