I don’t own an annuity and probably never will. But I still recommend them from time to time.
You might be wondering how on earth can someone recommend a product or service they openly admit they won’t ever use themselves.
Let’s start with the statement we hear most often about annuities, “They are not good investments and you can do better in the stock market.” And I would agree, over time, the stock market — generally referring to the S&P 500 — outperforms most annuities. The key point of this argument is “over time,” and that’s one point where an annuity is different.
It’s really not fair to compare annuities to other investments or products without looking at how we apply them. You wouldn’t use a shovel to rake the leaves or a rake to dig a hole — it’s best to use the right tool for the right job.
I’m sure it’s possible to rake the leaves with a shovel or dig a hole with a rake but that’s a waste of time. And when it comes to investing, time is money.
So let’s talk about which are the right jobs for annuities. There are two points that would make owning an annuity a good decision. Notice, I didn’t say good investment. I’m going to come back to that later.
Point number one is that you may not have enough money. As you get older, your risk level may decrease and if you don’t have a big enough nest egg, it won’t produce enough money to live. On the other hand, striving for a higher rate of return with riskier investments could cause you to take on too much risk and potentially ruin your financial situation even further. The solution could be an annuity. There are annuities that can provide a guaranteed stream of income that are higher than other guaranteed or low risk investments.
Point number two, is really two parts in itself, first you have to have an understanding of the stock market or any other investments you’re investing in — and you have to have the emotional competence not to go against that understanding.
If you don’t understanding how to invest, it’s pretty cut and dry, you either get help or don’t invest. It’s really your emotional competence or lack thereof that can really screw up your financial life.
If you do get help and hire a financial advisor, it’s still very important to understand your emotional competence. In this case you have to have the emotional competence by trusting your advisor but also be able to sleep at night too.
In situations where someone has enough money but lacks that overall comfort of investing into the stock market then it goes beyond your trust in that advisor or that advisor’s ability to invest. It’s not about your trust in that advisor or their abilities at all. It’s about you not being able to sleep at night knowing your investments may go down next week — regardless of the end result (which we already determined is going to be just fine).
Okay, let’s go back to that investment comment I made earlier. Are annuities good investments? It depends on what they are being compared to and the situation or solution they are solving. If you need a steady stream of income guaranteed where your current investments can’t provide then annuity may be right for you. If you are uncertain of the stock market and think you’ll make a poor decision because of what you see or hear on the news — you should consider an annuity. If you think an annuity is going to outperform the stock market over long periods of time, you are probably wrong and an annuity is a poor decision and investment.
There are a lot of different annuities and many situations where owning one is a smart decision. Not every annuity is going to be a good fit even if you meet the above criteria I mentioned in this post. Do your due diligence before making a decision on weather or not an annuity is a good fit for you.