Should an Annuity Be Part of Your Retirement Strategy?
An annuity can be a valuable retirement planning tool—but it isn’t right for everyone. Depending on the type of annuity and how it is structured, an annuity may provide principal protection, tax-deferred accumulation or a source of retirement income. In exchange, you may accept limitations on liquidity, surrender charges or restrictions on how your money can grow. That’s why at Catalano Financial, the conversation doesn’t begin with an annuity. Catalano Financial provides annuity planning in The Woodlands, Texas, as part of a broader retirement and financial planning strategy.
It begins with what you need your money to accomplish.
We look at your retirement income needs, other investments and income sources, time horizon, liquidity needs, risk tolerance and overall financial strategy before determining whether an annuity deserves a place in your plan. For the right person, an annuity can help solve a specific retirement problem.
For someone else, the right answer may be not to buy one at all.
What Is an Annuity?
An annuity is a contract with an insurance company designed to provide certain guarantees, accumulation features or income options.
Unlike a traditional investment account, an annuity may be designed to protect principal, accumulate value on a tax-deferred basis or create a stream of income during retirement. The specific benefits, limitations and costs depend on the type of annuity and the contract selected.
At Catalano Financial, we primarily evaluate two types of annuities when appropriate:
Fixed Annuities
A fixed annuity generally provides a stated interest rate for a specified period while protecting the contract value from direct stock-market losses. For someone who values predictability and principal protection, a fixed annuity may be worth considering as part of a broader retirement income strategy.
Fixed Indexed Annuities
A fixed indexed annuity credits interest based in part on the performance of a market index, subject to the terms of the contract. Your money is not invested directly in the index. Instead, the insurance company uses a crediting method that may include participation rates, caps, spreads or other limitations to determine how much interest is credited.
Fixed indexed annuities can provide protection from direct market losses while offering the potential for interest credits linked to market-index performance. Some contracts also offer optional features designed to create retirement income. They can also be complicated.
Understanding how the contract actually works matters more than the illustration or headline rate used to sell it.
That’s why we evaluate an annuity in the context of your overall Financial Planning and Investment Planning strategy—not as a stand-alone product.
When Might an Annuity Make Sense?
An annuity should have a specific job within your financial plan.
Depending on your circumstances, an annuity may be worth considering when you want to:
- Protect a portion of your retirement assets from direct market losses
- Create more predictable retirement income
- Reduce the amount of market risk you need to take with other assets
- Accumulate money on a tax-deferred basis
- Add another source of income alongside Social Security, pensions and investment withdrawals
- Create greater confidence around how essential expenses will be funded in retirement
The question isn’t simply, “Is an annuity good or bad?”
The better question is:
“What problem would this annuity solve in my financial plan?”
An annuity should be evaluated alongside your other assets, income sources, liquidity needs and Retirement Income Planning strategy—not in isolation. And sometimes the analysis leads somewhere else. Your existing investments or other income sources may already accomplish what you need without adding an annuity.
That’s why we prefer to begin with your Financial Road Map® and understand the bigger picture before discussing a specific solution.
When Might an Annuity Not Make Sense?
An annuity may not be appropriate if you need ready access to the money, don’t understand or aren’t comfortable with the contract’s surrender provisions, already have sufficient guaranteed income, or can better accomplish your objectives through other strategies.
The product should fit the plan. The plan shouldn’t be built around the product.
Annuities and Retirement Income
One of the biggest changes in retirement is moving from accumulating money to creating income from it.
During your working years, a paycheck typically arrives on a regular schedule. In retirement, that paycheck may need to be replaced by a combination of Social Security, pensions, investment withdrawals and other income sources. For some retirees, an annuity can become one piece of that income strategy. An annuity may be used to create a more predictable source of retirement income while allowing other investments to remain positioned for different goals, such as growth, liquidity or legacy planning. But the goal isn’t necessarily to create guaranteed income from every dollar you have.
The goal is to determine how much dependable income you need, where that income should come from and what the rest of your money needs to accomplish. That’s why we evaluate annuities as part of your broader Retirement Income Planning, rather than treating the annuity as the retirement plan itself.
For clients who want ongoing coordination of their investments, retirement income and broader financial decisions, that strategy may also become part of a Strategic Wealth Management relationship.
An annuity can be a tool for creating retirement income. The important part is determining whether it is the right tool—and how much of your retirement strategy should depend on it.
What Does an Annuity Cost?
Unlike financial planning or investment management, an annuity typically does not have a separate advisory fee paid directly to Catalano Financial. When you purchase an annuity through Peter Catalano, the insurance company may pay Peter a commission or other insurance-related compensation. The amount can vary depending on the insurance company, type of annuity and specific contract selected. That creates a potential conflict of interest, which is why we believe compensation should be clearly disclosed and the recommendation should begin with your financial needs—not the compensation associated with a particular product.
You are never required to purchase an annuity through Catalano Financial and are free to purchase insurance products through another insurance professional.
Does the Commission Reduce My Account Value?
The way costs are reflected in an annuity depends on the specific contract. Annuities may include surrender charges, optional rider costs and other limitations or expenses that should be understood before purchasing.
Before implementing an annuity, we believe you should understand:
- How the annuity works
- How the insurance company and advisor are compensated
- What guarantees the contract provides
- What access you have to your money
- What surrender charges or other restrictions apply
- What alternatives you have
You should understand both the benefits and the tradeoffs before deciding whether an annuity belongs in your financial plan.
How We Evaluate an Annuity
At Catalano Financial, we don’t begin by asking which annuity you should buy. We begin by understanding your goals, retirement income needs, existing investments, liquidity, risk tolerance and what you need your money to accomplish.
If an annuity appears appropriate, we can evaluate available strategies and help you understand the benefits, limitations and tradeoffs before you make a decision. The annuity should earn its place in your financial plan.
Not the other way around.
Start With the Bigger Picture
If you’re considering an annuity—or already own one and aren’t sure how it fits—your Financial Road Map® is a good place to start. FINANCIAL ROAD MAP® — $500
Prefer to learn more about Peter first?