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What would you say if I told you there was an investment product that would solve your biggest retirement savings problems? A product that would give you a guaranteed income for life without any fuss or risk on your part, whether you live three years past retirement or 30?
You'd probably say, "What's the catch?" You might worry I was going to rant about annuities again and go on about the huge fees, the happy brokers in their Ferraris, the lousy performance, and all that stuff.
I am indeed going to talk about annuities. But "rant" is a little strong, and I've softened my stance on this investment vehicle.
It's true that there are a lot of reasons to be skeptical of annuities.
- High fees. Brokers and insurance sales agents love selling certain kinds of annuities, because the commissions can be huge. Guess who pays those commissions? You.
- Lousy returns. Annuity products that purport to track an index or an underlying pool of investments will almost always underperform a similar mutual fund or a stock portfolio you can build on your own, at minimal cost.
- Surrender charges. Buy an annuity and decide a year later that you want to "sell" and get your money back? Good luck: You may get hit with a giant "surrender charge."
But not all annuities are salesperson-enriching boondoggles. Some actually make a lot of sense, for certain folks in certain circumstances.
Annuities can be your friends
The simplest form of annuity is the lifetime income annuity, where you pay a lump sum to an insurance company, and get a guaranteed income for life in return. These products offer a couple of obvious benefits: Your income isn't dependent on Mr. Market's whims, and you won't outlive your money.
For a lot of people right now, those two benefits are a slam-dunk sales pitch. Many folks who were inclined to pooh-pooh annuities during the bull market a few years back (including, um, me) have reconsidered their position thanks to the market crash. It's true that many stocks have regained lost ground since the market bottomed in early 2009, but the tremendous volatility in recent years has caused many retirement-minded investors to rethink their risk tolerance.
What you want in retirement, after all, is predictability: You want to know that you'll have enough money next month, and next year. Strategies that rely on stocks -- even conservative stocks -- can blow up. Just ask folks who were holding big positions in General Electric (NYSE: GE ) , Bank of America (NYSE: BAC ) , or Dow Chemical (NYSE: DOW ) and counting on dividends to fund their retirements. Those companies all seemed like sure-thing perennial dividend payers -- GE was AAA-rated and Dow Chemical hadn't cut its dividend in 97 years -- until they were forced to slash their dividends in the wake of the financial crisis.
Dividends are a great source of income, but they're never guaranteed, as lots of Ford (NYSE: F ) and General Motors retirees can tell you. BP's (NYSE: BP ) generous dividend looked pretty solid just a few months ago, but even if the stock is a screaming buy, the dividend may well not survive the current crisis unscathed. I could go on and on, but you get the point: Stock-based retirement strategies that looked great a couple of years ago are now keeping a lot of folks up at night.
If you've been counting on stocks like these, it might be time to consider an annuity.
But friendship always has a price
So which annuity should you buy? Annuities come with a dizzying variety of features. If you want to leave something for a surviving spouse or heirs, or have your payments indexed to inflation or to the stock market, there's an annuity that can meet your needs. Of course, you'll pay for these features. The more features you get, the lower your monthly payment, generally speaking. And those payments can vary widely depending on where you buy your annuity and on the size of your salesperson's commission.
The complexity -- and those fees -- can making shopping for an annuity a daunting proposition. That's why my fellow Fool Robert Brokamp, lead advisor of the Fool's Rule Your Retirement service, has been spending a lot of time wading through the annuity swamp. Robert has been looking for the types of products that make the most sense for Foolish-minded retirement investors, and he has put together a great guide to the ups and downs of annuity products. The guide is featured in the new issue of Rule Your Retirement.
If you're considering an annuity, Robert's article is a must-read that can save you lots of time, aggravation, and money. Rule Your Retirement is a paid service, but you can get full access for 30 days absolutely free, with no obligation. Just click here to get started.
Not quite ready to give up on the stock market? Fool Dan Caplinger shows you where to look for surprising dividend stocks.