Should I use annuities as a temporary investment?


A Reader Asks:

“Should I use annuities as a temporary investment?”

“I invested in a four-year fixed annuity several years ago to allocate a percentage of my portfolio into a vehicle that was conservative. At the time, it was the safest, risk-free investment recommended by my investment adviser. The annuity is set at 4 percent annually. I am a long-term aggressive investor who makes about 12-15 trades a year. My retirement horizon is between 2-5 years away from now. Is this a safe strategy going forward?”

Our Answer:

Annuities are never “temporary” investments. From your question is appears that you have a fixed annuity with a guaranteed rate of 4% for 4 years. There are a few other moving parts with annuities.

1. After the 4 years are up, the rate may change. It probably will.
2. What are the redemption fees and how long will they last? Many annuities charge a redemption fee if more than 10% of the principal is withdrawn within a specified number of years.
3. Annuities can provide a guaranteed income stream for your lifetime. If you need guaranteed income beyond pension and social security, it may be worthwhile to see what this annuity offers.
4. Once you begin taking that guaranteed income (it’s called annuitizing), you can no longer request a withdrawal of your investment. The money now belongs to the insurance company which, in turn promises you a check for as long as you live.
5. Unless there is an inflation adjustment, the check from the insurance company will not change and its buying power will be eroded by inflation.
6. A guaranteed annuity income for life may allow you to invest aggressively with more confidence with the rest of your money.

These are just some of the issues you should be aware of. Consult an independent advisor for more detail.

Arie J. Korving, CFP Co-founder, Korving & Company 3


Arie J. Korving, a CERTIFIED FINANCIAL PLANNER™ professional, has been delivering customized wealth management solutions to his clients for more than three decades. Prior to co-founding Korving & Company, he was First Vice President with UBS Wealth Management and held management positions with General Electric.

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