Episode 43: Annuities as an Investment Option for Retirement

Isaac Wright: Well, welcome to Wright Money Tips. It’s August 2023. Looking forward to some cooler temperatures, but you know, at least on the front half of the summer, it’s been reasonable. So I’m not going to sit here and complain too bad. But as you remember from last month’s program, we started talking about some of the basics of financial and retirement planning, talking about IRAs, the definition of an IRA, when you want to utilize an IRA, and so forth.
So this month, we’re going to talk about the word annuity. Because there’s so many definitions around the word annuity, probably so many opinions around those. But, again, I want to cut through all of that and start talking about some facts.
And with us today is Mr. Kevin Buenvenida. Kevin’s one of our lead advisors here at Financial Dynamics. Kevin, we see annuities every day. I think it’s important to say that there’s many types of annuities, but in the context of the word annuity, let’s give some of the folks that may not know exactly what it is, a definition.
Kevin Buenvenida: Yeah, absolutely. So, as we think about investing or saving for retirement, an annuity is an investment vehicle first and foremost. The big difference between, let’s say, your stocks and bonds mix is that the annuity is provided by an insurance company. So, as we think about providing funds or a lump sum benefit, we’re entrusting that the insurance company is going to be part of that equation to provide for you specific contractual guarantees or obligations that they’re going to uphold for you to invest with them.
Isaac Wright: Gotcha. And then in the world of an annuity. You give money to an insurance company, that insurance company in return provides contractual guarantees based upon its own strength, its own capabilities.
But, you know, if you work and you utilize an annuity correctly, the output from that annuity in the future typically revolves around what?
Kevin Buenvenida: Yeah. So, depends on what your goals as well as your overall risk tolerance look like with regard to investing, but also in consideration of the annuity.
When we think about some of the features that an annuity might be able to provide for you. Principal protection comes first ti mind. Couple of different flavors or styles of annuities that will help accomplish that. Something like a fixed index annuity will help accomplish protecting your funds but also providing some sort of growth rate. Or a financial benefit such as withdrawals or income down the road.
If you’re a little bit more risk tolerant. You have a longer time horizon to getting to retirement or whatever your financial goal might look like and you’re okay accepting some risk. Put it this way, the ups and downs of the stock market, but still signing up for contractual guarantees, a variable annuity may be something to consider as well.
But what if we absolutely need withdraws from our investment base, income, to supplement Social Security or pension or just to cover expenses that we’ve projected out as part of your long term retirement planning. Immediate, or maybe even deferred income-based annuities could help accomplish or be part of some of the goals that you have outlined for retirement.
Isaac Wright: Awesome. So, what you all are hearing from Kevin, I want to summarize. An annuity has many options in terms of what your end goal is. But for the most part, people want some contractual guarantees around some future amount of money that they can depend on for income or depend on as far as not having too much loss of that particular amount in that annuity. Again, getting back to the contractual guarantees. And that’s typically more on that fixed or that index annuity side.
So when you’re thinking about income, a lot of people today, as you all already know, do not receive a pension check. They are only receiving Social Security and/or maybe in conjunction with that, some other smaller sources of income. But many companies today are not offering that big pension check that you can depend on when you retire after 25, 30 years.
So in that zone, an annuity is a pension alternative. If it’s structured correctly. However and I want to bring this up. Kevin, we have found, and of course we utilize this in our planning approach, we have found many times insurance carriers when it comes to not income, but the actual interest that you make on the cash that you invest can be far greater than what you can find in a bank or other institution.
And I know interest rates have really ratcheted up here over the last year, year and a half. You want to talk a little bit about some of that as well. I think it’s important to say because people do know what CDs are. People do know what their money market account is paying. So without making it too good to be true, I think it’s important to talk a little bit about the fact that if you use an annuity correctly. What have you found when it comes to making a fixed rate of return or the potential of having no loss with a similar approach?
Kevin Buenvenida: Yeah, so the past 15 years have been an interesting area to invest, especially if you’re a saver versus a spender. And if you are in that position of saving for the last 10 to 15 years, your bank may have been providing you 0.0 nothing on savings and CDs.
And what we found as somewhat of a CD or even bond alternative as part of a comprehensive but also diversified investment plan, some of these annuity companies are providing CD like rates of return that are guaranteed with a little bit of a kicker on top, meaning that the rate of return is a little bit higher than what you would be able to get from a CD at a bank.
But if we also consider a vehicle, like a fixed index annuity, without complicating the definition here, basically benchmarking a rate of return or the growth of your annuity against a large market index like the S&P 500. We can earn portions of that upside positive return of the S&P 500 to produce a long-term average rate of return north of what a CD would be offering at the time.
And we think about taking risk with the market, a fixed index annuity, your allocation to the S&P 500 does not subject your investment or any of your previous growth to the market drops. So as we think about protecting your nest egg, but still delivering growth, especially in the light of a higher inflation environment, your money needs to work a little bit harder for you every single year.
Those types of vehicles have provided a lot of great resources where were protected in 2020 and 2022. And in light of the higher interest rate environment that we’re at today, we’re finding that we don’t still have to take a lot of market risk to get a very achievable and reasonable rate of return to offset inflation as part of a diversified investment plan.
Isaac Wright: Yeah. And just so you know, there’s a lot of different instruments that you can utilize to apply some downside risk. I’m not saying that this is the only strategy, and I don’t want to go into the well of ways to do this other than an annuity. But just the fact of the matter is this many people today are utilizing that annuity for a higher rate of return, having those contractual guarantees and the potential of utilizing some of that guaranteed money in the future for income. And when you do that in conjunction with the way I’ve just laid out, insurance carriers do bring some value to the table.
Now I also want to be clear. This is not too good to be true. And I think this is where people get into trouble with any investment, whether it’s a high flying stock or a real estate purchase or anything. You typically in order to receive these benefits, you have to keep the money in for a certain number of years. And you can structure that however many years under most circumstances the way it sees fit when it comes to a financial plan.
That’s one of the benefits of having a planner and a retirement professional, and that’s what we do here at our firm, is to be able to guide you through those time horizons and those downsides, let’s call it potential risk of having some of your money tied up. But the pros have typically outweighed the cons if you’re doing it correctly.
So, when it comes to the word annuity, please don’t jump to the conclusions of going to Google and typing that word in because you’ll get about 300 million hits. We’re here to cut through all of that clutter. One of the things that we talk about with annuities, just because we take this for granted, how can you fund an annuity?
I think some people are concerned or even confused about if they can use money from a 401(k)? Can they pull money from their savings? Like, you know, just in general, how do you put money into an annuity?
Kevin Buenvenida: Yeah. So the answer to both of those questions, whether it’s coming from a qualified account, like a retirement account or after tax funding, like a savings or checking account, the answer is yes.

Now, when we think about rolling over funds from a qualified retirement account, an IRA, and to the points you just spoke about, the surrender charge, basically the amount of time or surrender penalty, excuse me, the amount of time that you’ll have to hold onto the annuity before you’re able to take all of your funds out is a worthy consideration, making sure it’s aligned with your time horizon to retirement.
A rollover is basically what it’s called, or a direct transfer from an IRA to an IRA annuity. So, be mindful of that. You don’t want to make that mistake of taking a large amount of money from a 401(k) and then putting it into an incorrect type of tax classification for an annuity and you find out from Uncle Sam next year that you have a pretty big tax bill.
But the premise is the same too. If you wanted to take funds from, let’s say, a savings account or in consideration of toning down risk, let’s say you have a taxable brokerage account, you could move cash over to a non-qualified investment with an insurance company, a new annuity company, excuse me, contract that you would fund, and you would get a couple of specific benefits by doing it in that route, mainly tax deferral.
So if you think about your brokerage account, you think about a CD or savings account, you pay Uncle Sam taxes every single year you seek growth. With a non-qualified deferred annuity, to be specific, you don’t pay taxes every single year that you earn some sort of interest. You actually pay taxes when you take the money out of the annuity, and it basically allows your monies to work a little bit harder for you every single year without being eaten away by taxes.
Isaac Wright: Yeah, I mean, Kevin, I think these are all, again, basic building blocks of terms that many of our listeners, people that walk in our door have heard, good and bad behind that term, but not knowing really what the end game would be.
And so for today, ladies and gentlemen, for all of you listening, when it comes to owning investments as part of your retirement portfolio, an annuity can really help generate income, can provide some contractual guarantees around not losing your principal, maybe even having a higher and substantially higher rate of return than money otherwise sitting at banks and money market accounts.
With that in mind, if you have any questions, you’re looking for a fiduciary that can walk you through the ups and downs of whether or not making a decision of purchasing or putting money into an insurance contract, like an annuity makes sense, feel free to reach out to us. Isaac Wright, Kevin Buenvenida. We want to say thank you for always tuning in and until next month, we’ll talk to you soon.
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