I keep hearing from Clients that they want investments that have a reasonable return and are guaranteed in that they will never lose money. In essence they want to know if there is such a thing as guaranteed investments.
I would say the simple answer to this is no. However, there are fixed annuity products that are available that have options that allow you to buy an annuity, have a minimum amount the annuity increases in value and have the ability to take a certain amount of money out every year for your entire life.
In some respects this looks and acts like a guaranteed investment. While it is not a guaranteed investment, it is an investment that has contractual guarantees that your income base will increase in value and when it’s time to take money out, and you will get an income stream that you won’t outlive.
This guarantee is a completely separate thing from the investment itself. The actual investment can go up and down like any other investment. If you want to take money out of the annuity before you start drawing a regular income you can, but taking money out will decrease the value of the income stream.
After you start taking a regular payment from the annuity the underlying investment can go down. This means if you want to cash out for some reason, the amount of money you might get would be less and in some cases much less than you invested.
There really is no such thing as a guaranteed investment. But, fixed annuities can often look and feel like an investment that is a guaranteed. For some this is a great thing and for others it doesn’t fit the bill.
The real issue around an annuity with income guarantees is, what are your needs? In many instances investment managers and financial advisors use annuities for those who don’t have a traditional defined benefit retirement program. And for this purpose, annuities can be the right investment to have for some individuals.
Like everything else in the investment world the answer to the question “Is this a good thing?” should be answered with “It depends.” I think having a conversation with your financial advisor about this idea is useful, but it’s not a slam-dunk that you should run out and invest your money in an annuity. Remember, it depends.
As always, I’m interested in your thoughts about the topic(s) mention in this article. If you have any questions or comments, please contact me at Jpatrick@stage2planning.com.