“But it goes against my investment philosophy of ‘you can’t control the market, but you can control your expenses,’” Harris said.
A 65-year-old woman with a pension, Social Security and savings could benefit from the guaranteed income an annuity could provide, Tasciotti said. “If she invested savings on her own, there is risk, because you don’t know what the return will be,” Tasciotti said. “I would recommend an immediate annuity for some of the money, not the whole sum, because you need some liquidity,” he said.
For a couple in their 50s who are not looking for immediate income but to accumulate money, an annuity may or may not work, Tasciotti said. “This is where you get into trouble with annuities because the annuity may have features that they don’t need,” he said. “You have to ask them ‘Do they like the idea of guaranteed income?’ Or are there other qualities of an annuity that are attractive to them?”
An annuity could fit into the big picture, but “the only time I would recommend an annuity to a 50-year-old couple is if the benefits were worth the costs,” Tasciotti said.
Annuities have no annual contribution limit, which can make annuities attractive for wealthy clients who have met their contribution limits for IRAs and 401(k)s, Herzberg said. “If you’re going to have it in there for the long haul, you can put a large amount of money in there tax-deferred,” he said.
Tasciotti said annuities have features that you can pay extra for that tailor them to specific needs. For example, one doctor client with a poor family medical history liked an annuity feature that waived the surrender charge if he went into a nursing home.
“To him, that was money well spent,” Tasciotti said. “It gave him peace of mind.”
Harris offers a different opinion. “People will pay extra for flexibility, but you don’t have to pay extra. Go to another product in the universe of investments.”
There is often a sales commission with an annuity, plus an annual annuity fee and maintenance fees. “Even if you get a no-load annuity, there are maintenance fees,” Harris said. “It’s hard to get a grasp on the fees.”
Tasciotti said the fees are the price you pay for guaranteed payments or guaranteed income for life. “There’s no free lunch. If you want a deferred annuity with guaranteed income, there are costs,” he said. “If I want those kinds of promises, then somebody has to be paid to do the work.”
Surrender charges are an early-withdrawal penalty imposed if you take out money in your annuity early. “Most people who come to me are shocked to learn there are surrender charges,” Harris said. “They think it’s going to be like a CD and just pay the interest.” Typical surrender charges are 7 percent for the first one to three years, then decrease one percent a year until they reach zero.
Feldman said he accepted the surrender charges because “we’re basically saying ‘We’re not going to touch that money because we’ve got it locked in,’” he said. “We’re not going to say next year ‘We need that money.’ We’re not going on a European cruise. We don’t have any big expenses planned, and if for some reason we do need access to money, we’ll get it elsewhere.”