Andrew Rosen: Annuities as an Investment

Welcome to the Annuity.org podcast, your path to financial freedom through better understanding annuities, selling structured settlements, personal finance and retirement planning. I’m Terry Turner, and in this episode, we conclude our three-part series on the basics of annuities with Andrew Rosen, president of Diversified, LLC, a financial planning and investment management firm. He’s been getting us up to speed on the basics of annuities, and in this episode, we’ll be discussing annuities as an investment.

Mr. Rosen, thank you again for being here.

Thanks for having me, Terry.

So, what kind of person or investor is an annuity best suited for?

If you are a more risky or risk-willing type of investor, most of them don’t have annuities in their portfolio. If you are someone that wants to defer some of that risk, whether that’s growth risk on your investments or turning it into an income in the future, and you want that to be more predictable and put that on someone else because you are not comfortable with markets, that’s where an annuity generally starts being a viable option.

I talked to someone recently who talked about buying annuities as you would buy bonds for his portfolio. Is there a comparison between the kind of return or the kind of risk between bonds and annuities?

Yeah, to some degree, there’s some level of comparison. I mean, you’re really generally talking about a fixed annuity in that regard. Which is, instead of — and again, as I stated earlier, fixed annuities are glorified CDs, if you will. And so, if you think about it in those terms, if you want … especially nowadays where interest rates are actually paying something again. But if you’re looking to say, I want a portion of my portfolio to be risk-off, or less risky, I should say. There’s always risk in everything.

Then what you would do, what you could do, is you can say, I’m comfortable with this portion of my portfolio not having as much volatility and risk. And instead of doing it in the bond market, you can certainly look to alternatives, one of them being a fixed type of annuity.

Let’s say you’re looking at an annuity as part of your investment portfolio. How does it compare to stocks, bonds, your retirement account through work? Where does it fit in to that kind of planning, and what should a person consider when they are considering buying an annuity as part of that portfolio?

Yeah, how does it compare? Well, again, typically it has more costs. On the other side, typically it has more predictability. If it’s in a nonretirement account, but still for retirement, it will give you … you should understand the tax implication. My mutual fund will pay taxes each year on it and things of that nature. If I make changes throughout the year to switch from this fund to that fund, I’ll pay some … there’s taxable ramifications. And in an annuity, because it has special tax language, you don’t have taxes as you make changes or throughout the years, but you’ll pay a higher ordinary income tax when you pull it out on the growth.

There’s also less accessibility without penalty if you buy an annuity not in a retirement account until you’re age 59-and-a-half. Again, why you don’t see a lot of people in their 20s and 30s purchase these things. They are more retirement focused. That’s the thing to consider. Do you want deferral? Do you want accessibility? Do you want predictability? And then compare and contrast that versus the other options, which would be your more uninhibited traditional investment products, mutual funds, ETF, stocks, bonds, things of that nature.

So how does inflation and rising interest rates factor into your decision to buy an annuity? We’re seeing a lot of changes with annuities during this period of rising interest rates, right?

Yeah. It’s interesting because you are buying a contract and locking in, and interest rates are a lot of what determines a lot of the features in an annuity. So, if you’re doing a fixed annuity in a rising interest rate environment, much like a CD, you may want to do a shorter term. Because you believe that when the term comes up, rates will be higher, in which case you’d rather get a longer term at what you believe the high point is. Inflation, I mean, think pension. If you’re taking the money now and doing something like an immediate annuity, inflation won’t be factored in.

You may see in environments like this, products like a deferred annuity that is tied to more investment sub-account product that has the ability to grow hot more than a fixed product and hedge against inflation. So, you’re seeing more of that type of move in this environment. And additionally, some of the riders or bells and whistles you can purchase will be more attractive at higher interest rates, because it just gives you higher predictability. And the insurance companies are willing … because they can protect themselves better, they’re willing to give you more … or I should say, richer benefits than in a low-interest rate environment.

Thank you very much for joining us, Andrew.

Terry, the pleasure is mine.

Andrew Rosen, President of Diversified, LLC in Delaware, Pennsylvania, Massachusetts and Alabama. And thank you for joining us on the Annuity.org podcast. For more information about annuities, personal finance or anything else we talk about on this podcast, check out Annuity.org, your path to financial freedom.

You can subscribe to the Annuity.org podcast for free — wherever fine podcasts can be found. Our theme music, Feeling Good, was produced by White Hot, available at freebeats.io. I’m Terry Turner for Annuity.org.