Thank you for joining us for Episode 38 of our Money Wisdom Question Series, where we answer common financial and retirement investment questions. Today’s question is, “Should I Buy an Annuity?”
Unfortunately, annuities have a lot of confusing information about them out there. Some people say never ever buy an annuity, you’re getting ripped off. Other people want to use an annuity to solve every problem under the sun.
Before I answer the question, “Should I buy an annuity?” let’s talk about what an insurance company does. I know we’re talking about annuities, but annuities are issued by insurance companies. An insurance company simply takes the risk away from someone and takes it upon themselves. When someone buys an insurance contract (think of auto insurance) you pay a premium to the insurance company and they take the risk away from you. The risk is shifted to them. If you get into an accident, they’re going to pay the bills, the liability, and fix the car. You could have kept that risk to yourself, but instead, you shift the risk.
In an annuity, you shift the risk; two main risks.
1. Risk of Outliving Your Money
One type of annuity is like buying a pension. You can give the insurance company a lump sum and in return, you get a contract that says as long as you live, they’re going to send you a monthly check. For some people, that makes a lot of sense. Other people don’t want to give up control of that lump sum.
2. Risk of Losing Money
I own a particular type of annuity where when the market goes up, I get some interest. When the market goes down, I don’t lose any money. What am I doing there? I’m shifting the risk from myself, a market loss, if I just have stocks to the insurance company, where they’re saying I can’t lose money. In the good years, I’m going to get some interest.
An annuity is simply a contract with an insurance company that takes the risk away from you, the investor, and puts it upon themselves. The question becomes, is an annuity right for you? We don’t know the answer to that until we know your individual situation and how much safety you really care about.
Thanks for joining me and I hope you found this information helpful!
P.S. If you enjoyed this topic and want to learn more, download our offer, “The ABCs of Fixed Index Annuities“.
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