Is an Annuity Right for Retirement? Your Annuity Questions Answered
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You may still have some questions about annuities so in this episode I answer your annuity questions. We have had several listeners ask some great questions which will help clarify how annuities work. After diving deep into annuities during this 5-week long month, we can all look forward to the next series where you will learn how to figure out who you will be in retirement. But before that, listen to this episode to get all of your annuity questions answered.\\xa0
Why can\\u2019t people just self-annuitize?
Ryan asks: why don\\u2019t individuals self-annuitize by using the IRS required minimum distribution (RMD) tables. This way they can keep control of their assets with the additional benefit of being able to leave the assets as an inheritance.\\xa0
This is actually a great idea and the idea that the IRS has behind the RMD. The primary difference between this example and an annuity is the risk factor. In an annuity, the risk has been removed in exchange for your loss of control of assets. So in this example, you would still maintain control of the assets but you would still need to factor in market risk and execution risk. Would you prefer to use your IRA in this way or get an annuity?
Do RMD\\u2019s play a factor in annuities?
Another listener is curious about the role that RMD\\u2019s play in annuities. Her husband recently bought an annuity and was told that he would have to begin the annuitization phase at age 70 \\xbd due to the RMD.\\xa0
The reason that he has this stipulation is that he must have bought the annuity using tax-deferred assets. If you have other tax-deferred assets you could postpone the annuitization period as long as you are still taking the RMD from other sources. If you have bought an annuity, did you use pre-tax or post-tax assets?
Why do insurance companies handle annuities, and how do they make money?
Insurance companies handle annuities instead of banks or investment firms because they are pooling risk from a large group of individuals to spread the risk in a similar way as that of an insurance policy. But the insurance company makes money much like a bank. They collect money from thousands of individuals and then they are able to invest it and earn a larger percentage than that of their policy payout. It\\u2019s like you going and buying a cd. It is important to remember that an annuity shouldn\\u2019t be seen as an investment but rather as a pre-purchased pension.\\xa0
What if you don\\u2019t want to know all the details surrounding annuities?
One listener thinks that annuities sound like an excellent option for her retirement but she doesn\\u2019t want to know about the fees and charges. With an annuity, it is important not just to read but also understand the contract which is no easy task. The way the contracts are written could cause you to accidentally break the contract if you aren\\u2019t careful. If you aren\\u2019t looking to be swamped by details, a fixed annuity is much more straight forward than a variable annuity.\\xa0
If you are considering an annuity you need to first think about your overall retirement strategy. Let the process drive decision making. Consider why you are interested in annuities. Are you looking to insure longevity risk, simplify your financial life, or buy a pension? Remember that you are not buying an investment. So what do you think of annuities? Do they seem like a good option for you?
OUTLINE OF THIS EPISODE OF THE RETIREMENT ANSWER MAN
HOT TOPIC SEGMENT
- [2:18] Who are you going to be in retirement?\\xa0
PRACTICAL PLANNING SEGMENT
- [6:50] Why wouldn\\u2019t people just self-annuitize?
- [8:55] Do RMD\\u2019s play a factor in annuities?
- [10:54] Why do insurance companies handle annuities?
- [13:40] What if you don\\u2019t want to know all the details surrounding annuities?
- [16:06] Are insurance companies selling off their annuity lines because they feel they can\\u2019t be profitable?
THE HAPPY LAB SEGMENT
- [20:24] I am excited about next month\\u2019s series that focuses on who you will be in retirement
TODAY\\u2019S SMART SPRINT SEGMENT
- [21:14] Eat the frog - do the thing you don\\u2019t want to do first thing in the morning
Resources Mentioned In This Episode
BOOK - Eat that Frog by Brian Tracy
Roger\\u2019s YouTube Channel - Roger That
BOOK - Rock Retirement \\xa0by Roger Whitney
Roger\\u2019s Retirement Learning Center