Stress-Test Any Annuity for Performance, Risk, and Fees

Whether you already have an annuity funded for retirement, or you’re considering whether an annuity makes sense for your financial goals, stress-testing this annuity is an important process to make sure your annuity is capable of meeting your retirement income needs. In our Guarding Your Nest Egg Radio Show we’ve covered annuities quite a bit, things like the pros and cons of annuities, comparing an annuity vs. all the other options, and Annuity Stress-Tests.  A Stress-Test is one of the most important tools we use to show our clients if an annuity is going to meet their needs in retirement.

What is an Annuity?

Annuities are insurance products that can be sold as a source of retirement income that pays out on a monthly, quarterly, or annual basis. Annuities can continue to distribute payments over the course of your life, no matter how long you live. Keep in mind that this may lead to less value if don’t live a long life or if your life expectancy is lower than average.

Annuities can be divided into several key types including; immediate annuity, fixed annuity, fixed index annuity, and variable annuities.
Fixed index annuities are based on the terms of the contract you sign and the performance of a stock market index and can offer a fixed income payment over a defined period of time including the life of the annuitant. They are positioned by insurance agents to protect against market losses. However, your total returns may be significantly limited and fees may reduce principal over time.

Variable annuities, on the other hand, are contracts where the value of the contract is based on the performance of underlying investments. Underlying investments typically include stock market and bond options in the form of allocations similar to mutual funds or bond funds. As this product’s underlying investments go up and down, your account value will change accordingly. This can be a pro or con depending on the outcome of that performance. If you are seeking income the lack of certainty can be a disadvantage for investors seeking consistent income and preservation of capital.

The potential drawbacks of variable annuities may include:

-High administrative fees and investment fees
-Complex contracts and payment calculations
-Penalties for taking your money out before the contract expires

A fiduciary financial advisor can help you better understand these pros and cons as they relate to your financial situation.

The Benefits of Conducting an Annuity Stress Test

It’s important to have a fiduciary financial advisor perform a stress test of your annuity to make sure its level of risk is appropriate for your financial goals and to see if the performance potential of the annuity will be enough to support you in retirement.

Having a stress test done can help you discover potential risks in your variable annuity before it impacts your financial outlook. Contact a financial planner today to learn more about stress-testing your annuity—as well as other investments in your portfolio.