Annuity: Homerun or Foul Ball?

I find the never-ending debate around annuities (good retirement investment or bad retirement investment?) fascinating and of personal interest, because I purchased a deferred annuity contract not too long ago. And you know, I was actually feeling kind of good about my annuity investment until recently when a financial advisor I engaged pointed out to me how expensive the fees were and suggested I might want to cash out my annuity at some point. The truth is my feelings about my annuity tend to ebb and flow with financial market performance, and I was already experiencing some misgivings about my purchase even before my meeting with this financial advisor.

So, why do I get a little queasy when I think about my annuity? First, prior to purchase, I never saw myself in an annuity. An annuity always seemed like a very conservative investment and I always considered myself more of gun slinger when it came to "playing" the market. Typically, I would have a liberal allocation to stocks and a conservative allocation to bonds, even as I got nearer to retirement age. Of course, my boat was rocked like everyone else's during the 2008-2009 recession when I saw my portfolio decrease by as much as 40%. I know this period changed my attitude about investments as I'm sure it did for many others, yet I held out like most and stayed pretty heavily invested in stock mutual funds. Still, the damage was done and a lesson was learned about the volatility of markets. Not that I wasn't aware of the volatility factor previously, but I had never experienced it like I did during the recession. In fact, as someone who is a little older, the markets had always been pretty good to me and setbacks were temporary at best. Most of the time my account balances were trending up.

It was the performance of my portfolio during the recession that first got me to think about the benefits of regular income in retirement that could be realized with an annuity. Adding to my concern at this time was the fact that my defined benefit pension plan had been frozen in the early 90's, and I really had no regular income I could count on in retirement apart from social security. Still, I seriously questioned tying my money up in an annuity which only stepped up 5% a year pre-distribution, and I pay for this step-up via a fee. I felt I could be left far behind should the market take off and we begin seeing double digit returns again.

Besides my concerns about tying my money up and possibly missing the upside of good market, I had all the other concerns that investors often have about annuities. I found my annuity contract to be extremely complex and I can honestly tell you today that I'm not 100% sure I fully understand the package I bought. Frankly, I don't think I'm alone here. I'm not sure the financial pro that convinced me to buy my annuity fully understood all the nooks and crannies of the contract I signed. Still, I felt that I had a good enough grasp on the contract details that I was comfortable in signing the contract. The key issue for me was having a steady flow of income in retirement and I was confident that this contract would meet my need in this area.

I had other concerns. I, like the financial advisor I recently engaged, was concerned about the high cost that went with my deferred annuity contract, because I bought the "Cadillac package"; the one that offered a guaranteed increase in benefit each year up to distribution and a death benefit. I knew this would cost me a lot in fees each year and, as indicated, my financial advisor drove this point home again in our very first meeting. He also mentioned that the sales person received a very nice commission for getting me into my annuity. The fact is I was already aware of this, but my financial advisor wanted to make sure this point didn't get by me.

My concerns did not end with the possibility of missed market opportunity and high costs. Another big concern I had with my annuity was the security behind it. If I put money in a bank, I know I have the protection that the FDIC provides. When I put my money into this annuity, the stability of the insurance company that sold me my annuity will determine if I see a benefit from my contract. To better ensure a payoff from my annuity, I bought from a major player. Still, American International Group/AIG (not my annuity provider) was a major player and nearly collapsed, and there have been concerns expressed about the stability of other large insurers recently. I do understand there is an industry-financed safety net for people like me should an insurer fail and not be able to live up its obligations.

All in all, it was a tough-tough decision to buy an annuity contract for all the reasons cited here, and it took me months to make my decision. Yet, I made the leap. "Why?", you ask.

Besides wanting a steady flow of income during retirement, as I've already pointed out, I also wanted the safety net that an annuity provides when investing in volatile markets. What I mean by this is that I continue to invest in the market and, of course, with the market comes risk. What my annuity has done, is it has allowed me to sleep better at night, because I now know that no matter how bad the markets get, I will always have the cash flow peace of mind in retirement that comes with owning an annuity. In baseball terms, I feel like I've hit a solid double with my annuity, and I'm hoping I can now hit a home run or two with the riskier investments outside of my annuity. Some financial advisors will recommend that you have enough regular income in retirement between social security, pensions and annuities to cover all your basic needs. I'm not there, but I'm part of the way there. I still consider myself a risk taker and I don't want to be too comfortable, because I don't think putting money in my mattress is the way to go, but my annuity does make me feel a lot better about taking and accepting risk. And I do sleep a little better knowing I have an annuity should we experience another recession like the last one. Yes, I'll always wince when I see the costs for my annuity and it will likely never be viewed as a homerun investment, and there'll always be some small risk regarding my insurer's ability to pay, but on the whole it works for me.

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