By TONY MONTANARI, CIMA® I | FREE CONSULTATION
A common question that many of my clients ask me is Should I consider an annuity?
An annuity could be a solution for a portion of your portfolio depending on your financial situation, investment mentality, and how you tend to react to volatility during periods of stock market declines.
Variable annuities can give you some exposure to the upside of the stock market along with a future income guarantee and maybe a death benefit guarantee, if you sign up for it. However, these benefits/guarantees come with a hefty price.
Depending on the specific annuity, once you add up all the fees associated with the contract, you could see total annual fees as high as 3.5-4%! That is about double the amount of fees an investor would pay working with a financial advisor who will professionally manage a portfolio of Exchange Traded Funds (ETFs) and mutual funds. An extra 2% per year in fees, compounded for 10, 20, or 30 years can really be a drag on the portfolio performance, especially for a benefit that you may never need.
Another important limitation with most annuities is the lack of investment options and portfolio customization. Most insurance companies will control the asset allocation of the underlying portfolio and limit your mutual fund choices. Typically, this means that most variable annuities will allow the maximum exposure to stock-based mutual funds to be approximately 60-70% of the portfolio allocation.
I do believe however, that certain clients can benefit from the features of a variable annuity with a lifetime income benefit. Many financial advisors present annuities as a safer way to be in the stock market, but I tend to believe that annuities should be viewed as an alternative to bonds instead of stocks, especially in todays low interest rate environment. Either way, if a financial advisor is only talking to you about an annuity as a solution for your financial planning and portfolio management needs, I would be skeptical. I think it is very important to look at your options side-by-side and discuss the long-term benefits and costs of owning an annuity versus a portfolio of ETFs and mutual funds.
Remember, whether an annuity is the right choice for you depends on a number of factors. At ACM Wealth Management, we customize solutions based on your individual goals, objectives and tolerance of market volatility.
TONY MONTANARI , CIMA® is a financial advisor located in Charlotte, NC . TONY has over 18 years experience working with local businesses and investors. More information about TONY can be found at http://www.ACM-Wealth.com .
This article was written by and presents the views of our contributing advisor, not the WiserAdvisor editorial staff.
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