NPR News, Classical and Music of the Delta
Play Live Radio
Next Up:
Available On Air Stations

Annuities – What Are They And Do I Need One?

Mike Cohen

I get a lot of questions about annuities – what are they? Do I need one?

So, let’ see if we can unpack this topic a bit and de-mystify the whole topic.

First, an annuity is a fixed sum of money paid to someone each year, typically for the rest of their life. If you want such a fixed sum of income guaranteed for life, you typically have to buy it from a life insurance company. For example, a 65-year old man might pay $200,000 in exchange for $1,000 paid to him each month for the rest of his life.

Second, in order to facilitate this purchase, insurance companies came up with the idea of deferred annuities, which allow someone to put regular deposits into the deferred annuity, in hope of building up a sum large enough to turn into one of these lifetime income streams.

And finally, in hopes of accelerating the growth of deferred annuities, insurance companies came out with “variable annuities.” They are called “variable” because they are allowed to invest your contributions in the stock and bond markets, thereby creating account balances that are no longer stable, but variable (aka, going up and down with the markets).

A variable annuity is very, very complex. And it also tends to be very expensive. The investment vehicles inside the product are like mutual funds but are known as separate accounts. Each of these has their own internal set of expenses. On top of that, the insurance company usually charges a “mortality and expense charge.” That’s basically covering their cost of doing business. And let’s not forget about the surrender charges, levied in the early years of the contract designed to discourage you from taking back your money.

One topic that arises from time to time is, “Should I own one of these variable annuities inside of my IRA?”


Sometimes these products can offer additional benefits that make the additional cost seem worthwhile. These might include a death benefit or a guarantee of future income.


In general annuities’ primary benefit is to create an income in retirement. They’re probably not the first place I would turn to put money into to accumulate money on the road to retirement.


So, for example, one could save money towards retirement in a 401(k) plan, then at retirement, with the help of an advisor, determine that some of the money in the 401(k) plan could be used to buy a guaranteed lifetime income by buying one of those immediate guaranteed income annuities.


If you’re still working and saving towards retirement, and your advisor has put some of your IRA money into one of these variable annuities, there may be a perfectly good reason for that. If you’ve got questions, ask her.


But if you determine that no good reason exists, I would generally suggest moving the investments in an IRA out of the high cost variable annuity and into an investment that makes better sense for you.

Byron is a Certified Financial Planner and Managing Director of the Planning Group at Argent Advisors, Inc.
Related Content