As in every financial product, there is a lotta noise around annuities. There are many shapes and sizes. For financial planning purposes, explanation and fit will be in an unnamed book (the outline available to paid Substack subscribers).
Anyways, my opinion is that annuities can play an important role in creating a lifetime income stream, to add to Social Security benefits. This creates a layer of stability, which allows further flexibility in other financial areas. Married couples are frequently surprised to learn that a surviving widow cannot receive two Social Security checks, the smaller one will cease to exist. The income stream of annuity can be designated to expire only after the surviving spouse passes (second to die).
Annuities are certainly not for everyone. Some people are unaware of the function or availability of annuities until they are too old to begin, they are distracted by the noise, and pass, to their detriment. Some people, candidly, don’t require this layer, because their resources are so great, it simply does not matter. That is not the majority of people.
Some Naysayers Are Comparing Apples to Oranges
The detractors to annuities are many, but the reality is that I can easily swat away most of them. Here’s a pre-emptive list of responses to commonly-stated objections.
The fee and commission schedule, over the lifetime of the annuity, is on par with the fees that you pay financial advisors over that same period, without the downside risk (because that is NOT the FUNCTION OF AN ANNUITY).
If your stock jockey tells you that he can guarantee the income stream of an annuity, I have some prime swampland for you. 800-SWAMPLAND is the number.
Remember that the POINT of an annuity is NOT to replicate or outperform risky markets. That is absolutely not the case, all of the language (participation caps, etc) are built to limit the returns. However, you need to consider the FUNCTION of the financial allocation. You can adjust your allocation by appropriately SIZING the allocation to the FUNCTION, within your household net worth. Then you can decide if an annuity is appropriate.
For financial people to tell you “annuities are always bad because their performance doesn’t match the S&P” are glossing over some possibly-important facts, and contain a couple of built-in assumptions. First the market is always up. And second, you will only require the money when the market is at the highs.
The problem here is that there is a ton of jargon. Here is a pretty good list of the many terms: click here. On a related topic I have appeared with Jean Chatzky as part of the Alliance For Lifetime Income.
An oldie but a goodie.