Coffee or Tea?


It was simple growing up.  Coffee was coffee and tea was tea. Now, you get dozens of choices in either beverage. In the annuity world there are primarily two genres, Fixed and Variable.  Like beverages, there are dozens of choices in the two categories, so we need to understand their basic differences.  Always remember the history of annuities and their primary purpose: Lifetime Income.  With a fixed annuity the insurance company is going to hold a portfolio of investment grade bonds.  Bonds will generally make up 90% of the insurance companies portfolio.  They may hold  other investments like commercial real estate.  Each company knows the amount of interest income and will design products accordingly.  They are called “Fixed” annuities because of the predictable cash flow of the bond portfolio.  In a variable annuity the insurance company is offering a selection of mutual funds to chose from for an individual’s policy.  They are “Variable” because the underlining mutual funds can go up and down in value.  Both types of annuities can provide lifetime income.  With fixed annuities, and their predictable interest income, a company can offer guaranteed payouts without adding fees. (Some fixed annuities do charge fees and we will explain that in a future post) In the variable annuity world, to offer a guaranteed lifetime income, they need to charge a fee. (Fees are normally described as Riders) The fees are needed because of the inability to predicted future cash flow with mutual funds. Those who offer fixed annuities have a state insurance license.  To offer variable annuities a person needs to have both the insurance license and a securities license.  What is important for the consumer to decide is the degree of certainty that they want for their lifetime income.   My clients want a high degree of safety and predictability in their retirement plans.  In my practice, I only offer Fixed Annuities.  My reason is because of the ability to more accurately predict future income for my clients without requiring fees.

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