When Barbara Feldman of Kendall retired from the Miami-Dade County Public School System after 44 years in December, she received her retirement funds in a lump sum. She and her husband, Steven, a certified public accountant, reviewed investment options for the money. They decided on annuities.
“Because it was her retirement funds, she wanted a safety net with the least risk possible,” Steven Feldman, 63, said. “We wanted principal preservation.”
Annuities, an investment wrapped in an insurance policy, can offer guarantees — such as a steady income stream for a certain period of time — that are attractive to investors who want a stable income during retirement. But those guarantees cost money, and the fees that accompany annuities are often a turn-off to investors and financial advisors.
Here’s how an annuity works: you buy an annuity for a lump sum, and then it makes payments to you over time. But there are a lot of choices. Your annuity payments can be immediate or deferred. Payment rates can be fixed or variable. Your payment period can be for a set number of years, or for a lifetime. Earnings are tax-deferred, but because annuities are designed as a retirement tool, withdrawals before 59 1/2 will be subject to a 10 percent IRS penalty.
Philip Herzberg, a Miami certified financial planner and president of the Financial Planning Association of Miami, said annuities can be confusing because it’s a complex product.
“There are a lot of variables. There are different flavors and types that have evolved over the years, but there are basically two components: it’s an investment wrapped around an insurance contract,” he said.
Feldman said they bought two deferred, fixed-rate annuities that will mature in 10 years. “I still work … but I wanted to build a plan for cash flow for when I retire,” he said. “Our primary focus was for safety, not for growth. We can’t afford to lose this principal. It’s a substantial amount of money for us.”
Feldman said they looked at the pros and cons, including high “surrender charges,” or early withdrawal penalties, they would incur if they took out the money in the first seven years.
“We looked at the options and decided what was right for us,” he said. “There are a million variables when it comes to annuities. You have to know what’s right for you.”
Feldman’s advisor, Dan Tasciotti, a certified financial planner with Tasciotti Financial in Miami, said annuities can be a prudent investment in the right circumstances.
“If you’re looking for guaranteed income for the rest of your life, than an annuity may be right for you,” he said.
On the other hand, Ana Cela Harris, a certified financial planner and estate attorney with Cela Advisors in Miami, said she recommends annuities for very few clients. She said she doesn’t like the lack of transparency in the fee structure.
“Fees just eat away so much of the returns,” she said. “And with an annuity, you’re locked in. I like flexibility. I’d rather have a choice. If you commit to an annuity, you don’t have a choice.”
Harris said there are a couple of scenarios in which an annuity could work. For risk-averse clients with modest means, an annuity can supplement Social Security payments and supply a steady income stream, she said. “It can work for people who want to ‘set it and forget it,’” Harris said. High-income clients who want to protect income from creditors, such as a doctor who wants to protect personal assets in the event of a malpractice claim, also can benefit from an annuity.