Before you buy an annuity….

Before you buy an annuity….

October 20, 2015

Before you buy an annuity….

Potrait of Gardner Sherrill


Investing for your retirement can be a scary process. With all of the attention given to financial markets, it’s no surprise that one would want to escape the noise and settle for a “guaranteed withdrawal” or a “minimum return”. The truth is that there are no perfect investments; they all have their benefits and weaknesses. Annuities can help guarantee an income you can’t outlive but at what cost? They are complex structures that are often misunderstood by both the buyer AND the seller.

I don’t particularly like annuities but I think it would be irresponsible not to consider their inclusion in an overall plan. Annuities have an ability to generate guaranteed income and that can add tremendous financial and emotional benefit in the retirement planning process. My concern is that they can be often oversold, misunderstood, and dispensed like diet pills. My objective is that after having read this you will have a general understanding of the benefits AND limitations of annuities to better determine if they make sense in the overall pursuit of your goals. Some key issues to consider


In the simplest of terms an annuity is guaranteed income for life. It can be thought of as reverse life insurance. Whereas life insurance protects your family from your dying too early, an annuity is meant to protect you from living too long and running out of money.

What percentage of your current expenses are covered by guaranteed income sources that you can't outlive? Manage annuity allocations to balance your need for guaranteed versus non-guaranteed income sources.


For those who fear the potential loss of money because of poor investment choices, the "guarantee" in an annuity can be the driving interest. We recognize that this "fear factor" is real and should be a driver in many people's investment decisions. Accordingly, we fault no one who chooses lower risk approaches, and that's especially true of those who are retired.

What is your risk capacity and is it congruent with your risk tolerance? Manage annuity allocations to target your risk-based needs.


Annuities often come with potentially high surrender fees you will pay should you need the proceeds in advance of the contract terms. In Florida, they have passed the “10/10” rule that states that the maximum surrender period is 10 years and the maximum penalty is 10%. Most new contracts will allow for a 10% annual free withdrawal from the policy but every dollar over that will be penalized according to the contracts declining surrender penalty schedule.

How much liquidity would you need to manage potential emergency needs. Manage annuity allocation based on as little as needed to meet your specific goals.


Annuities often market themselves on the basis of their ability to avoid taxation on investment growth through tax-deferral. The catch comes once you take money out of the annuity. If you are younger than age 59 and 6 months you will pay a 10% penalty for early withdrawal. The more favorable capital gains rates don’t apply to annuities; all taxable gain is treated as ordinary income no matter how long you own the annuity. This loss of capital gains status can make a big difference when considering the use of non-qualified money.

Are taxes a consideration in your planning needs? Compare the tax deferral benefits against the ordinary income and potential penalties. Will the net tax advantages outweigh the deficits?


Annuities should be considered based on their contractual guarantees. This guarantee is a transfer of risk whereby you pay the insurance company to take this risk on your behalf. The transfer of risk may be well worth the cost in certain circumstances but ultimately it is a cost that will reduce your overall investment returns. Some annuities include riders which are extra features that can be added to the annuity for additional costs, again further reducing the investment return.

What risk are you looking to manage? Find the product that addresses that need for the lowest cost.


Maintaining one’s lifestyle over a period of time requires growth of assets in order to offset inflation. Net of Fees and Taxes, annuities may not be the best way to grow your money.

What is the joint life expectancy of a 62 year old couple? Actuarial tables say its 30 Years. Half of us will live less but half of us will live longer. For the half of us on the longer end, I would argue our biggest concern should be the growth of our income. Does your plan include a means to double your income over the course of your retirement?


Annuities are at the forefront of financial engineering. They require a whole new language to learn: Performance caps, spreads, & floors, minimum returns, participation rates, index rates, market value adjustments M&E charges, administrative fees just to throw out a few new terms.

Question – Why would you consider one annuity over another? Do you understand the minimum guarantees in a contract? Compare options by breaking them down on an apples to apples basis. How much cash flow will you receive for every dollar invested?


You’ve likely heard the phrase – “Buy term and invest the difference”. This philosophy was started in the late 70’s to educate the public on the inefficiencies of combining investments with insurance in the form of whole life insurance policies. The argument was that when buying insurance you should focus on the maximum coverage for the cheapest expense. The savings from this strategy should then be reinvested to grow your wealth.

We believe you should consider a similar philosophy as it pertains to annuities. Determine how much benefit you need whether by safety or income. Compare contracts on how much benefit each dollar buys? Purchase only as much benefit as necessary to target your goals.

Gardner Sherrill, CFP, MBA, is an independent financial advisor with Sherrill Wealth Management. To learn more visit The opinions expressed in this material are not intended to provide specific advice or recommendations for any individual. Securities and advisory services offered through LPL Financial a registered investment advisor. Member FINRA/SIPC.

Published in Bradenton Herald: October 20, 2015

By GARDNER SHERRILL |Investor’s Column

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