VIEWS: 5 PAGES: 2 POSTED ON: 4/10/2011
?Annuities: Too often misunderstood I often refer to options as the orphaned investment because brokers do not understand them therefore they are not promoted. They are misunderstood by too many that think they know all about them. Fact of the matter those that talk bad about them probably have never traded them. Same ideals for Annuities. Very misunderstood by misinformed individuals that continue the "myths". This is not the space to go into the myths. You can conjure up your own rather this is a time to set facts from fiction. Most retirees end up owning annuities. They think they don't, but in fact they do. Once you finish with this report, you realize that more than you think are in Annuities. Social Security although terribly run is an annuity. So anyone that receives Social Security belongs to the largest annuity. Lottery winners if they do not take a discount in lump some are taking an annuity. Most pensions and state retirement systems use payouts in annuities. So now that we know most retirees without them realizing it are into annuities, why don't we discuss what they are. Annuities have two components. 1) The accumulation phase this is where you place your money into an account for later use. 401k, IRA's etc although not technically speaking as annuities, they can be used for the accumulation phase. Annuities can and do accumulate tax deferred. AND there is no cap on how much you can put in with after tax dollars. 2) Annuity phase or more often referred to as the "Annuitant". This is the distribution phase where the annuitant receives payments. Once you receive your first payment from SS or a pension or an annuity, you cannot change it. Why? Because the calculations are based on actuarial numbers. For those that do not understand this, it simple means that the average person will live to be "X" years. Based on how much is in your accumulation account and how long you are expected to live and how much return on the money, you get a check for that amount. For the set time or the set amount Now of course I have made this far more simple than what complexities there are to this. The main point is that no one knows exactly how long they will live. If you happen to live longer than you were supposed to, would you run out of money? If your investments went south for 5 years in a bear market would you have enough to continue receiving payments or would it run out? I invest primarily in options and have for over 20 years. However it would be irresponsible for me to offer these types of investments to the elderly without them fully understanding the risks. What the elderly need is a fixed amount that they can count on no matter what happens. After that any excess could and should be used to adjust the loss of purchasing power over the years. If retirees try to "guess" how much they can take out to spend each month and guess wrong (as in 5 year bear market, living longer than was supposed too etc.) it can be very detrimental in the later years. If the fear of outliving the investments is too great, many try to under guess thus providing less monthly income for many years. Even if they do not live the age they are supposed to. For younger workers the need to accumulate should be foremost. But for retirees that have no other source for income than what they saved (yes Social security included) they are gambling at best on the outcome. If they gamble correctly they win if they don't, it is a miserable golden years.
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