Annuities seem to be the prized product of many insurance agents and brokers, but are they a wise investment? We ask a financial advisor and investing expert for the facts. Enjoy the show!

When it comes to investing after retirement, Pam Krueger has a wealth of information. An author, PBS co-host, and financial planning expert, Pam helps women of all ages connect with fiduciary advisors that will work hard to protect their clients’ money. She has some great advice for us when it comes to investing in annuities.

Knowing How Annuities Work

It’s hard to know whether or not an annuity is right for you if you don’t truly understand what one is. In short, when you purchase an annuity you are going to a broker or agent, signing a contract, and giving them a large portion of your savings. They invest your money and promise to give it back in payments after an agreed upon time.

Upfront, that doesn’t sound like a bad deal but there are some underlying conditions that might make you change your mind.

For example, when your savings are invested, the agent and broker will take a large chunk of your return in commission, up to eight percent! On top of that, they will take two to three percent each year in fees. What once looked like a wise investment is now looking like not much of an investment at all.

Knowing How Brokers and Agents Work

It’s important to understand how annuities work but it’s even more important to understand why agents and brokers want you to buy them. In fact, annuities are being sold all the time to people who do not understand how much their agent or broker is taking from them.

Most agents and brokers push annuities because it is an easy way for them to take a good portion of your money. They may appeal to your desire for a straightforward and uncomplicated investment by selling you an annuity that seems quite cut and dry, solving all of your financial problems.

However, statistics show that nine out of ten people who buy an annuity later regret doing so. They give away a big chunk of their savings only to find that their agent or broker has kept most of the earnings in commission and fees.

Knowing When to Buy an Annuity

So, is it ever a good idea to buy an annuity? It can be. People who find themselves in a really high tax bracket who have already exceeded their contributions and other tax favored types of accounts might find that an annuity gives them a tax benefit. But annuities are really only beneficial in such specific financial situations, despite being advertised as a great option for all investors.

Knowing Who to Trust

While insurance agents and brokers may be trying to play into our insecurities as women who are retiring, it’s hard to know who we can trust with our financial security. Pam advises that the only proven source of guaranteed help for you and your money is a fiduciary advisor.

Fiduciary advisors are not paid to sell you a product. They do not receive commissions or earn fees from your money. Instead, they are paid a flat rate to protect your money and advise you how to make the best decisions regarding your investments.

Knowing How to Access Your Money

One fact that many people do not realize is that when you purchase an annuity, you cannot get that money back if you need it. If you don’t have a great deal of cash, this tool is not for you.

Pam has found that the greater annuities are packaged and the better they sound, the higher their fees and the more restrictive their clauses. Fees and penalties are almost always hidden, and your cash stays tied up, out of your reach.

If you don’t have more than a few years’ worth of cash on hand, you need to keep that cash liquid so that you can use it when you need it. If you tie it up in an annuity, you will not be able to get it back.

Knowing How to Divide Your Money

Pam suggests that women should look at their funds as if they were going in three separate buckets.

The first bucket holds your living expenses for the first year or two after retirement. That money needs to stay within your reach in a practical checking account so that you are able to spend it as you need it.

The second bucket holds short term bonds or dividend paying stocks and other monies that you can make minimum withdrawals from at some point.

The third bucket holds your long-term money such as different types of stock funds and index funds. Your money is going to fluctuate up and down over time, but you will not need to sell out of weakness or impatience. You will have plenty of time to watch it climb and become more secure long-term.

Dividing your money this way ensures that you will have money when you need it and that it will continue working for you and providing for you the rest of your life.

Have you ever purchased an annuity or been pressured to buy one? What reasons did the agent or broker suggest that an annuity was a great product for you? Do you divide your funds into three buckets? Please share your advice and experiences in the conversation!