Are Annuities Right For Physicians?
One of the principal tenets of investing is that no one single investment is right for everyone. Every investment has certain characteristics, risks, and objectives that must match those of the investor, and annuities are no different. Although annuities have become more popular in light of the recent financial turmoil and the carnage left behind in retirement accounts, care should be taken in answering ‘are annuities right for physicians?’
As economic uncertainty increases, concerns over financial security mounts causing people to look for alternatives that provide more guarantees and predictability. Currently, more than 50% of pre-retirees fear that their assets won’t generate the income they need for their lifetime. Because annuities protect principle while providing a guaranteed income that can’t be outlived, physicians are looking to them for at least a portion of their retirement portfolio.
Before considering an investment in an annuity, physicians should ask themselves these questions:
Am I contributing the maximum amount to my retirement account?
Annuities do offer the advantage of deferring taxes on earnings until they are received, just as qualified retirement plans, however, contributions to annuities are not tax deductible. As a general rule, investors should take every advantage of using their before tax dollars to save for retirement before considering other investments. It is possible to invest in annuity within your qualified plan. Although you wouldn’t benefit from the tax deferral of the annuity inside your plan, it can add stability to your portfolio and produce a guaranteed stream of income at retirement.
Do I pay the maximum amount of taxes?
Physicians’ incomes typically are subject to taxes in the higher brackets, so they stand to benefit more from the tax deferral of annuities. The deferral of taxes is important because it helps offset the fees and expenses associated with annuities and it enables your money to compound faster. Physicians in lower brackets wouldn’t realize the same amount of benefits as investors in higher brackets, so they may be better off in taxable investments.
How much time before I need the money?
An investment in an annuity is for the long term. Although annuities allow access to your funds, the early withdrawal penalties limit your access to 10% of your balance per year. There are also IRS penalties for withdrawals made prior to 59 ½. More to the point, annuities work best when they are left to work so that the tax deferred compounding can work its full magic. Unless your timeframe is such where you can hold the annuity for at least 15 years, it may not be right for you.
Do I have enough cash?
If your investment funds are committed to long-term or illiquid assets, you need to ensure that you have enough liquid assets in the event that your circumstances require them. This is especially important after you have retired. Once an annuity is annuitized (converted to a stream of income), your capital is committed to the insurer. It’s always advisable to have at least six to nine months of living expenses set aside in a liquid savings account.
Do I lie awake wondering if I will run out of money in retirement?
Most studies done on the subject indicate that an alarming number of Baby Boomers will fall short of their income needs during retirement, which means they will need to delay retirement or drastically cut back on their life style expectations. Life expectancies are expanding in the face of economic uncertainty and that is enough to keep most people up at night. Annuities are the only vehicle that can provide a secure, predictable flow of income coming for as long as you live.
The final analysis
If your assessment produced more than one affirmative answer then you may be a candidate for an annuity and it would be worth exploring the different types that are available. Annuities are complex instruments and they include many features that need to be fully understood. And, because they are a long term investment, it is important to go into an annuity investment with eyes wide open. Are annuities right for physicians? Maybe, or maybe not. If it is determined that annuities are right you for your particular situation, they could be one of the best investment you can make.