ONLY ONE ANNUITY

Conservation of Matter in Annuities

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Introduction

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Researching annuities can be overwhelming due to their various characteristics, leading many to make suboptimal choices that don't align with their financial goals. To simplify this complex topic, it's best to start by understanding the common features shared by all annuities.

Common Building Block: Funding with Bonds

All annuities share a common foundation - the securities used to fund them, usually bonds. This means that despite the apparent differences between annuities, many are backed by the same types of bonds since insurance companies have access to similar bond options.

Decision-Making: Allocating Resources

Each annuity essentially has a fixed "pie" of resources, but how those resources are allocated and distributed depends on the annuity's specific features. Any additional features added to the contract may sound beneficial, but they often come at the expense of reducing the contract's overall earnings potential.

Understanding the Role of Additional Features

While some additional features may be suitable for certain retirement goals, it's essential to determine if you will actually need and benefit from them. Paying for features you won't utilize can lead to lower returns.

Comparing Annuities to Cars

Annuities can be likened to cars with the same engine but different mileage and performance based on the specific model. Additional features in annuities may provide comfort but can impact the annuity's earnings potential similarly to running a car's air conditioning impacting fuel economy.

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Examples to Illustrate Annuity Choices

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Example One - Return on Your Money vs. Return of Your Money

Comparing two annuities, one with a 30% premium bonus and guaranteed payouts for life, and the other with higher average annual returns but no extra features. Both annuities offer protection against market loss and similar monthly income. However, the latter option leads to more money for beneficiaries in the long run, while the bonus-laden option restricts access to principal and limits payouts.

Example Two - Consistency of Return Can Cost You

For shorter-term annuities (under five years), guaranteed contracts might outperform fixed indexed annuities (FIAs). However, for longer-term annuities, FIAs tend to outperform guaranteed contracts, with worst-case returns equal or higher than the guaranteed rate.

Example Three - Not All Strategies Are Created Equal

Different strategies in FIAs have varying impacts on returns:

1. Fixed Rate Accounts: Offer consistency but may lead to lower returns due to limited promises by insurance companies.
2. Monthly Cap Accounts: Can return up to 100% of index gains, but low monthly caps may significantly diminish returns, even resulting in no return during a market upswing.
3. Annual Capped Accounts: Details not provided in the text.
4. Annual Uncapped Participation Accounts: Details not provided in the text.
5. Two-Year Uncapped Participation Accounts: Details not provided in the text.

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Example Four - Averaging Strategies Lead to Below Average Returns

Averaging methods and volatility control indices in fixed indexed annuities typically provide consistent but lower returns compared to fixed rate accounts, as they sacrifice potential gains from market volatility.

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Conclusion

When considering annuities, it is crucial to understand their common features and carefully evaluate additional benefits. Choosing the right annuity that aligns with your retirement goals can lead to better financial outcomes in the long run.

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