The annuity puzzle is the phenomenon where people rarely purchase individual annuity contracts, despite the theoretical benefits of doing so. But how can people get over their reluctance to buying annuities?
Michael Finke, Professor of Wealth Management at the American College of Financial Services, joined Robert 'Bob' Powell on Decoding Retirement to discuss annuities, the 4% rule, other retirement strategies, and much more in this week's episode of Decoding Retirement.
Income annuity (decoded)
An income annuity is an insurance contract that converts a lump sum of money into a guaranteed stream of income payments, typically for the duration of the annuitant's life, providing a fixed amount of money each month in exchange for a single premium paid upfront.
"A great way to think about it is to focus less on your investment portfolio and more on your lifestyle. So, the big problem that I see is that people get to retirement. They've saved a million dollars or $2 million or $500,000, and they just put their arms around that nest egg and they don't want to see it get smaller," Finke says. "We have to become more comfortable with the idea that we need to spend the money down. And when you become comfortable with that idea, then buying something like an income annuity makes a lot more sense. It's a lot easier to take."
Author: Zach Faulds
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Retrieved from: Yahoo Finance
FINRA Compliance Reviewed by Red Oak: 4123415
Fixed Annuities are long term insurance contracts and there is a surrender charge imposed generally during the first 5 to 7 years that you own the annuity contract. Indexed annuities are insurance contracts that, depending on the contract, may offer a guaranteed annual interest rate and some participation growth, if any, of a stock market index. Such contracts have substantial variation in terms, costs of guarantees and features and may cap participation or returns in significant ways. Investors are cautioned to carefully review an indexed annuity for its features, costs, risks, and how the variables are calculated. Any guarantees offered are backed by the financial strength of the insurance company. Surrender charges apply if not held to the end of the term. Withdrawals are taxed as ordinary income and, if taken prior to 59 ½, a 10% federal tax penalty.
Please consider the investment objectives, risks, charges, and expenses carefully before investing in Variable Annuities. The prospectus, which contains this and other information about the variable annuity contract and the underlying investment options, can be obtained from the insurance company or your financial professional. Be sure to read the prospectus carefully before deciding whether to invest.
The investment return and principal value of the variable annuity investment options are not guaranteed. Variable annuity sub-accounts fluctuate with changes in market conditions. The principal may be worth more or less than the original amount invested when the annuity is surrendered.