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9 Annuity Do’s and Don’ts For Baby Boomers

As baby boomers approach retirement, many are wondering if an annuity is the right investment for them. Especially since every time they step foot into the bank – the financial advisor there is pushing them to buy annuities. And so is their financial advisor. And their insurance agent too. They sound too good to be true, and everyone suggest an annuity – they must good, right?

Before I begin, I just want to thank you for taking the time to read this article on my blog. I am a former Financial Planner – so I have no incentive to sell you annuities at all. My purpose is to educate you so that you can make the right decisions for yourself. Without the conflict of interest of a Financial Advisor. From the perspective of a journalist, with the knowledge of someone who owned their own Financial Planning practice for twenty years.

Brief Introduction – What is an Annuity?

  • The term “annuity” refers to an insurance contract that company creates and distribute with the goal of paying out a fixed income stream in the future.
  • Annuities are purchased with a lump sum, or over time with monthly premiums.
  • The company creates a future stream of payments for a set amount of time or for the rest of the annuitant’s life.
  • Annuities are mostly used for retirement planning and to reduce the danger of outliving your money.

What Are The Benefits of An Annuity For Baby Boomers

As baby boomers approach retirement, many are faced with the decision of what to do with their 401(k) or other retirement savings. One option is to roll it over into an annuity. This can be a good choice for some, but there are also some potential pitfalls to be aware of. The following are 9 things to consider when a Baby Boomer is making the decision to purchase an annuity.

As baby boomers approach retirement, you face a unique set of challenges. Many are still paying off mortgages and other debts, while others are dealing with the costs of caring for aging parents. At the same time, baby boomer are facing the reality that your own retirement savings may not be enough to last through your golden years.


I have the unique perspective, and I hope you can gain from my experience. As a financial planner – I helped walk baby boomers through this process every day. In addition, I worked with people at the tail end of their retirement – so I could share their experiences with clients as well.

One way to address these challenges of retirement is to purchase annuities. An annuity is a contract between an individual and an insurance company, in which the insurer agrees to make periodic payments to the annuitant, starting either immediately or at some future date. In English? You give a set amount of money to an insurance company, and they pay you back each month for as long as the rest of your life. Imagine you could trade in $200,000 and get an extra $1,000 per month of Social Security for the rest of your life (just a random example of numbers). That’s basically what an annuity agreement is.

Related Reading: Young baby boomers much more interested in hearing about annuities than older investors are

Well Michael, that’s not at all how the nice young man at the bank explained it to me. EXACTLY. Annuities have morphed and gotten even more complex over the years. And are now sold as ways to invest in the stock market risk-free. WIth all sorts of bells and whistles attached to them.

But at the end of the day, an annuity is designed to eventually pay you a fixed stream of income over a period of time. Don’t take my word for it. The pure definition of the word annuity, as defined by Webster’s dictionary: “

annuity: A sum of money payable yearly or at other regular intervals”

Webster’s dictionary

So, we now know the ultimate reason for annuities to exist, is to provide a retirement income stream for you. We know annuities are complex. And we know everyone is trying to sell you one. Which leads us to…

There Are Several Benefits of Annuities For Baby Boomers.

FirstAnnuities Can Provide a Retirement Income

Annuities can provide a stream of income that can last for your lifetime. This can be especially helpful for those who are worried about outliving their savings. Whether your concern is outliving your income, or you know you have a low tolerance for risk.

  • There are some things to consider before purchasing annuities.
  • Annuities can be a useful tool to provide steady stream of income in retirement.
  • Traditionally, there are two types of annuities: fixed and variable.
    • Fixed annuity will receive the same income each month
    • Variable annuities will vary, based on the performance of the investment options you choose.
  • If you are choosing to ‘annuitize’, or create an income stream – you need to decide how long you need the income stream to last.
    • Your lifetime
    • the lifetime of you and a spouse, whoever lives the longest
    • a set number of years such as 5,10, 15 years

SecondAnnuities Can Hedge Inflation

Annuities can help to hedge against inflation. As prices rise over time, the payments from an annuity can be set to increase as well, providing a measure of protection against the loss of purchasing power.

  • There are several ways to combat the effects of inflation on annuities.
  • An annuity may have a fixed interest rate or payout. On option is to choose an annuity with a built-in inflation adjustment feature.
  • Finally, Baby Boomers can consider using a combination of annuities with different features to protect themselves from the effects of inflation.

Third- Annuities Can Provide a Death Benefit

Annuities can provide a death benefit to loved ones. This can help to ensure that loved ones are taken care of financially in the event of the annuitant’s death.

  • When a policyholder with an annuity dies, the annuities death benefit is paid to the beneficiary designated in the contract.
  • The death benefit from an annuity can be a valuable asset for a beneficiary.
  • When choosing a beneficiary for annuities important to consider the tax implications of the death benefit.

Fourth – Annuities Can Provide Tax Benefits

When it comes to saving for retirement, annuities offer some unique tax advantages that can help you boost your nest egg. Here’s a look at how annuities are taxed and how you can use them to your advantage.

  • Annuities are taxed as deferred annuities. This means that the money you contribute to an annuity grows tax-deferred. In English? You don’t pay taxes as the money is growing. This allows the account to grow larger over time. You defer paying the taxes until you withdraw the income from annuities.
  • This can provide a significant tax advantage, especially if you are in a higher tax bracket. And expect to be in a lower tax bracket in the future.

The Drawbacks of Annuities For Baby Boomers

Annuities can provide a stable income stream for baby boomers. Annuities have been touted as a great way for baby boomers to ensure a comfortable retirement. However, there are several drawbacks to consider before investing in annuities.

FirstAnnuities are Complex

Annuities are complex products that can be difficult to understand. Before investing in annuities, be sure to do your homework and understand all of the fees and features involved. When I had my financial planning practice – I was amazed at what I saw and heard.

Discussing annuities with clients and other advisors – it blew my mind! The complete lack of understanding and the amount of misinformation. I don’t blame the clients who misunderstood what annuities were – they are very complex. But when advisors don’t understand them, it worries me.

Then I realized, maybe there is more to it. Me personally, when investing someones life savings, especially when it needs to last the rest of their lives. I personally took that trust and confidence to another level. I needed to fully understand everything, then make sure the client knew the pro’s and con’s of what they were deciding to do.

So why do financial advisors not understand annuities? We know, they are complex. When you are required to give a client a prospectus over a hundred pages long, that’s a huge warning sign isn’t it? Secondly, most financial advisors don’t care about their clients. They just want the big commissions. How are the big commissions paid?

Second- Annuities Have High Fee’s

Annuities typically have high fees, which can eat into your investment return. Leaving you with less money to live on in retirement. If the entire point of a baby boomer buying an annuity, is to provide retirement income. And annuities have high fee’s- reducing your retirement income. Well, yeah, you can see the problem, right?

So Michael, are you telling me. That my banker, the financial advisor, and insurance agent. That they are all trying to just make a big commission on me? And it will hurt my retirement income? Because the big commissions are paid for by big fee’s? Which means less retirement income for me?

YES, that is exactly what I am saying. At least, in most cases. Annuities may make sense for you. In many cases they do. But is the annuity they are suggesting you buy, is that the right one for you? In most cases, unfortunately, they are not.

Here is an example. A client comes in, and says “I want to trade in $100,000 and turn it into income for the rest of my life”. First, I don’t think that has ever happened in my entire career… But if it did, the advisor SHOULD shop the annuity contract for the company that would provide the best benefits and highest income for the client.

The death benefit from annuities can be a valuable asset for a beneficiary.

Michael, don’t they ALL do that?

If they did, I wouldn’t need to write this long article, now would I? No, they don’t. First off. Depending on what company the financial advisor works for, they can only offer certain annuities. Imagine going into a Cadillac dealership and you say you want the most gas efficient car they have. And they try to sell you a big SUV, instead of a Tesla? Why – because they don’t sell Tesla’s there. That’s why.

And the salesman won’t tell you to go get a Tesla, because he only makes a commission selling you what he has. The same thing happens with annuities. The banker of financial advisor will sell you what he can. And in many cases, they will sell you what makes them the best commission, from what they can sell you.

Three – Annuities Are Not Flexible

Another downside is that annuities are not very flexible.

  • You cannot change the terms of annuities once they are established.
  • Once you invest in an annuity, you are locked into that investment for a set period of time. This can be problematic if your needs or circumstances change and you need to access your money sooner than expected.

There are typically severe penalties for closing annuities early. They are called surrender charges. Remember those high commissions that the financial advisor got paid for selling you an annuity? And the high fee’s that annuities have that eat into your returns? Those high fee’s are how the insurance company can pay those high commissions.

So the insurance company needs to keep you locked into the annuity. Usually for 7-15 years. In order to recoup enough profit to pay that high commission. This is fine if you understood it when you invested in the annuity. It is conveniently left out when it is sold, or just glossed over.

Fourth – Annuities Are Not Easily Accessible

Annuities are not easy to access your money if you need it for an emergency. You may be subject to surrender charges if you withdraw money from your annuity before a certain age.

When you have an annuity, you have an account that is set up to provide you with regular payments. This can be a great way to receive income, but it can also be difficult to access the money in your annuity if you need it. There are a few different ways to access the money in your annuity, but they may not be easy to do.

  • One way to access the money in your annuity is to surrender the annuity. This means that you will give up the account and receive all of the money that is in it. This can be a good option if you need a large sum of money and you do not want to have to wait for the payments. However, it is important to know that you will have to pay taxes on the money that you receive from the annuity.
  • Another way to access the money in your annuity is to take out a loan against the account. This can be a good option if you need a smaller amount of money and you do not want to surrender the account. However, you will have to pay interest on the loan, and you may have to make payments on the loan.
  • If you are not able to access the money in your annuity, you may be able to sell the account. This can be a good option if you need a large sum of money and you do not want to surrender the account. However, you will have to pay taxes on the money that you receive

Finally – Annuities Are Not Always Good For Heirs

Annuities are not a good investment if you are looking to leave money to your heirs. An annuity is not a good way to pass money to your heirs for several reasons.

  • First, the money that you put into an annuity is not available to your heirs until you die. This means that if you need the money for any reason before you die, your heirs will not be able to access it.
  • Second, annuities are often taxed at a higher rate than other investments, which means that your heirs will have to pay more in taxes on the money that they receive from your annuity.
  • Finally, annuities typically have high fees and expenses, which can eat into the money that your heirs receive from your annuity. For these reasons, an annuity is not a good way to pass money to your heirs.

A New Film, ‘The Baby Boomer Dilemma,’ Praises Annuities

A Few Major Red Flags About Annuities for Baby Boomers:

  • When an annuity is sold to a client using qualified retirement money such as a 401k or an IRA. One of the major selling points of an annuity is the tax deferred growth of the account. You pay higher fees to ow an annuity, which gets you this feature. Your qualified retirement accounts are already growing tax deferred. Would you ever pay to wear a rain coat inside? That’s what an annuity inside of a retirement account is – you are paying for something you don’t need.
  • Another is when you are being offered an annuity, before discussing your goals of that money. The most common example is when you go into your bank. The friendly teller notices you have extra cash in your accounts, and they just aren’t earning much interest. So they suggest you go sit down with their financial advisor.

Seems innocent enough. You know the teller for years, and they are just looking out for you right? Possibly. But the reality is, the teller just earned a $25 referral fee for getting you to meet with the branches financial advisor.

Now you sit with the financial advisor and they immediately start telling you how much more you can earn with an annuity. Didn’t ask you many questions, but they immediately knew the perfect, conveniently high commission paying, answer that’s perfect for you. And they tell you about all of the wonderful benefits, glossing over any of the downfalls of an annuity. Let me tell you, there is zero chance a financial advisor can properly suggest and explain an annuity in under an hour. Yet alone in five minutes.

Don’t walk out of the bank. Run.

If the annuity sounds too good to be true, it probably is. Every little bell and whistle they describe to you? Each one is LITERALLY an insurance policy added on to your annuity. With it’s own additional fee.


Related Reading: 11 Commonly Used Annuity Riders Explained

Annuities can be an important part of the retirement planning of the Baby Boomer Generation.

  1. 1. Consider an annuity as part of your retirement income planning.
  2. 2. Consider your overall financial picture when determining whether an annuity makes sense for you.
  3. 3. Consider your need for immediate income and whether an annuity makes sense for your situation.
  4. 4. Do your homework and shop around for the best annuity rates.
  5. 5. Review the features and benefits of different annuity products before making a purchase.
  6. 6. Make sure you understand the terms and conditions of your annuity contract before signing.
  7. 7. Pay attention to fees and expenses when considering an annuity.
  8. 8. Be sure to consult with a financial professional before making any decisions about annuities.
  9. 9. Remember that annuities are a long-term investment and should be considered as part of your overall retirement planning.

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The information here is for information purposes only, and not guaranteed to be accurate.  The information may not be full and complete.  This is not investment, insurance nor tax advice. You should talk with your financial advisor or accountant to figure out which of your options is best for you.

Michaelryanmoney.com does not provide legal or tax advice, and the information provided is general in nature and should not be considered legal or tax advice. Consult an attorney, tax professional, or other advisor regarding your specific legal or tax situation. Michaelryanmoney.com takes no responsibility for the current accuracy of this information.

Michael Ryan
Michael Ryanhttps://michaelryanmoney.com/
A former stockbroker, financial planner, and owner of my own financial planning practice and then a property & casualty agency. I have since retired and decided I want to help individuals and business owners by offering personal financial coaching. And now, I have started my blog - www.michaelryanmoney.com - to bring financial literacy to everyone. In a short time I have already been quoted and featured in US News & World Report, Business Insider, Yahoo Finance, and more (https://michaelryanmoney.com/home/press/) As a financial planner, I helped people from all walks of life. If you have questions about money, I will help you find the answers at www.MichaelRyanMoney.com
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