Annuities: Predictable Income, Protection Against Inflation

BY STEVE DINNEN

Annuities can be an important piece of your retirement income strategy. But it helps to first understand them, which is no mean feat as they seem to come in as many variations as do snowflakes.

All annuities have the same aim—to take some of your money now, invest it for a while, and then guarantee they’ll pay it back, plus a return. Some pay you for life, others for a set amount of time. Some pay a fixed rate of return, others have a variable rate. Some have death benefits for survivors, others don’t. Some tie their return to stock market performance and grant you a portion of the upside—which may vary from annuity to annuity—while protecting you against downturns.

So when you weigh whether to buy an annuity, get some advice. Maybe doubly so. One of those who might help is Kevin Wingert, CEO of Urbandale-based American Retirement Planning. Before forming that financial planning firm, Wingert was president of the main subsidiary of American Equity Investment Life Holding Co. That West Des Moines firm is a specialist in equity indexed annuities.

Perhaps surprisingly for someone who spent so much time in that corner of the insurance marketplace, Wingert doesn’t think everyone in the world needs an annuity. But plenty do, he said, because “when you retire you need predictable income and protection against inflation.”

People are living longer, and Wingert notes that they’re bearing more responsibility for providing for retirement income (company pensions seem to be a thing of the past). So they need to do something to protect their nest egg.

Wingert isn’t much of a fan of variable annuities (some have high fees, big sales commissions and poor investment choices that guide their return). He speaks better of MYGAs—multiyear guaranteed annuities. The insurance and asset management firm Nassau Re, which works with annuities, says that in some ways a MYGA acts like a bank CD in that it guarantees an interest rate for a set period of time.

Some annuities are alternatives to bonds, Wingert says. “[At] two, three or four percent, those returns are no different than high-quality bond funds,” he says, with the exception that with a properly bought annuity there is no risk to principal.

So they deserve a look. They have an advantage of being available in whatever size you want, from thousands of dollars to millons. Bear in mind that they tie up cash, so don’t go hog wild.

“You still need liquid assets for emergencies,” Wingert says.

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