What You Need to Know About Annuities

**Disclosure. I am NOT a financial advisor. I do not provide tax, legal, or any other financial advice. The following is my personal opinion and experience, which might not apply to you. You should always discuss new strategies and models with your financial advisor, tax attorney, CPA, and/or whoever else helps you with your financial or investment planning.**

If you desire to spearhead or direct your own financial future, ie. not just take advice and run with it but actually consider all sides and make an informed decision, then this is for you.

Many feel they must follow the Wall Street constructs of IRA retirement plans and 401(k)s. If you feel satisfied and comfortable there you can disregard everything I say.

However, there's always another side of the coin. Wall Street is very good at marketing its message. They tell you, you “need” this or that product.

I’ve seen too many people I work with show up with a hodgepodge of investments that look more like spaghetti on the wall than a true financial plan. It has no orchestration whatsoever.

Many have annuities. Few could articulate why. 

What is an Annuity?

An annuity is a guaranteed income stream backed by insurance companies. For the most part, insurance companies are pretty strong. If they go down, they get bailed out by the government anyways. We saw that back in 2008. So when I say guaranteed, it’s pretty close to being true. 

An income stream with certainty, has an interest rate to it, and is paid out monthly or quarterly. This certainty of an income stream is pretty attractive especially when you leave active income or sell your practice.

In search of creating replacement income, Annuities are sold as a product to help solve this problem. There are many ways to create replacement income, but more on that later.

The Benefits of Annuities

1. Tax-Deferred Growth. Just like any retirement account, it accumulates savings tax-deferred. You only pay tax when you receive annuity payments. 
2. Customizable to Your Lifestyle Needs. There are different terms and constructs and a lot of flexibility in structuring annuities (How long it pays, whose life it pays, when it starts, etc.). 
3. Downside Risk Protection. Annuities are protected from equity stock market volatility. Most, when they go into retirement mode, don't want to have the ups and downs of volatility in the market.
4. Guaranteed Income Stream. Again, Insurance companies can run strong and can even be backed by the government through bailouts.
5. Some Estate Planning Benefits: There is the option to customize your annuity to be able to pass it on to future generations, your heirs. 

The Drawbacks of Annuities

1. Breeds Complexity. Annuities can get really complicated and intricate. Complexity leaves room for many things to go wrong and many misunderstandings. I tend to stay away from complexity. I’ve met people who have purchased annuities in good faith, but they had no idea what they had. “Why do I have this? Someone's told me to.”
2. Money is Locked-In. You're often locked in once you’ve put your money in an annuity. If you want to take your capital back out, you will pay a penalty and tax if you haven’t yet similar to a 401(k) or IRA.  
   What if you want those funds earlier? What if you have a better opportunity than when you entered this annuity?
3. High Fees and Costs. All the companies, financial advisors, and others who sell these products must make a living. There must be a spread. Are the fees and costs warranted? You’ll have to decide if it’s worth it, considering all the benefits and all the costs. A lack of liquidity is not desirable in this era of the economy. 
4. Locked-In Interest Rate in an Inflationary Economy. Most annuities are created with the current market interest rate market when you buy them. If interest rates go up, well, you're stuck.    
   Some annuities do provide for inflation hedges, but there's a cost. There's always a trade-off, and it usually comes by way of limited growth potential. With high inflation, the value of that income stream will be diminishing every year. What sounds good today of a guaranteed income stream may not look so good in 10 years.
5. Tax Implications. The annuity can grow tax-deferred, which means that when you take withdrawals, you pay ordinary income tax rates. You don't get any long-term capital gains treatment, which is almost always lower than ordinary income rates.
6. Loss of Stepped-up Basis. There's no stepped-up basis like in real estate. A stepped-up basis would allow for the complete transfer and control of assets, wealth, and/or tax benefits. Annuities, however, hardly leave any flexibility for heirs. Whatever you signed up for is exactly what will continue to your heirs. They're stuck with it.

A Proven Alternative to Annuities

Instead of an official annuity, I can create secure and steady income streams all day long through direct investments secured by real estate.

I can invest in the debt or private credit part of the capital stack and create the same income streams without locking up my money long term. I have the flexibility to cash out when I want to as well.

I can pass them on to my heirs, and there's no stated period of time when my income streams are cut off.

With an annuity, there's always a point where it gets cuts off. When the term ends and the capital you have put into it is then gone. You don’t get it back. You paid in, you get some payments out, and that's it.

The income streams that I create in real estate, there's no cut-off date. I can always get my capital back. I might tie it up for certain periods of time, but I have the flexibility without all the complexity or fees like an annuity.

This does require access, a knowledge base, and a network to create these income streams. I had to do the work on the front end to make this approach viable. 

That’s why I created Freedom Founders. This is what we do. We curate the opportunities and the education needed. We provide a level of due diligence and underwriting, and provide a process by which we can become our own advocates for our financial future and are not rely on what Wall Street has tried to create for us.

I'm not saying that annuities are bad, but they don't provide the flexibility and nearly the kind of returns that I can create on my own– if I desire to be more of an advocate for my financial future.

There's different ways to create predictable income streams. If you’re looking for passive income you need to look for more than just the options that Wall Street endorses. They offer certain products that benefit them, and you either take it or leave it. 

Remember, this is not financial advice. Seek your own professional advice before you make any moves in any respect.

Benchmark your retirement and wealth-building against hundreds of other practice professionals, and get personalized feedback on your biggest opportunities and leverage points. Click here to take the 3 minute assessment and get your scorecard.