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What to keep in mind about annuities

January 20, 2019

Every week, Simply Money’s Nathan Bachrach and Amy Wagner are answering your financial questions in The Cincinnati Enquirer. If you, a friend, or someone in your family has a money issue or problem, please feel free to send those questions to yourmoney@enquirer.com

 

Janet in Milford: I’m 63 and hoping to retire within the next few years. I was thinking of getting an annuity, but not sure if I need one. How do I know if it makes sense for me? 

Answer: An annuity, in its most basic form, is an insurance product that provides a stream of income (either for a fixed period or for the rest of your life) once you hand over a lump sum of cash. Sounds pretty straightforward, right? 

Unfortunately, over the years, these products have become much more complex, confusing, and misunderstood. There are now numerous types of annuities, including “fixed,” “variable,” “indexed,” and so-called “hybrid.” Certain kinds of annuities can have high fees that could cost you three to four percent every year. And did you realize you need to pay to get access to your own money? This is called a “surrender charge” and can run as high as 10 percent. Much of these details are hidden in fine print, too. 

And keep in mind that an annuity salesperson might be recommending one merely to receive a big commission, which brings us to this interesting stat: annuity sales are at their highest levels since 2015, according to the Wall Street Journal – and this growth just happens to coincide with the demise of the “fiduciary rule.” This rule would have forced every type of broker and advisor to work in your best interest when dealing with your retirement money, including informing you of commissions, incentives, and other conflicts of interest. But without this rule in place we’re back to the “wild, wild west” in the annuity world, which can lead some salespeople to make unsuitable recommendations and use high-pressure sales tactics. We’ve seen some annuities pay as much as seven to 10 percent commission to the person trying to convince you to sign on the dotted line! You probably don’t need too much time to figure out whose pocket that commission comes from. 

Here’s The Simply Money Point: With all that said, an annuity can sometimes have a place in a retirement plan. But the definitive answer really comes down to your particular circumstance. To figure out if you need one, we recommend working with a financial advisor who chooses to abide by the fiduciary standard. As mentioned above, a fiduciary must make a recommendation that’s always in your best interest, not their own.    

 

Shawn and Cara from Ft. Mitchell: Is it smart for us to add our son (who is 15) as an authorized user on our credit card? We’ve read it can help him build credit. 

Answer: Some teenagers can run into a catch-22: they want a credit card to help build credit but can’t get one since they don’t have a credit history. So, yes, adding your son as an authorized user on your card can help him with this struggle. Any positive payment activity you make will go onto his credit report, giving him a jump start on building his credit. 

But before moving forward, be sure all of you understand the potential drawbacks. For instance, if your son goes on a spending spree, you’re still on the hook for the bill since you’re the primary account holder (this could also hurt your “debt utilization” ratio, which comprises about 30 percent of your credit score). And if you miss a payment, that could hurt his credit score, which would defeat the purpose of this endeavor.  

If this is something you decide to do, we recommend having a frank discussion with your son before calling the credit card company. Set guidelines and expectations, such as whether or not he’ll need to ask for permission before using the card, spending limits, and the consequences for not following the rules you’ve set up. 

Moreover, logistically, be sure to verify your credit card issuer allows minors to become an authorized user. Some do, others don’t. Also, check if there’s a fee (some premium cards charge extra for each additional issued card). You might also have the option of setting a lower limit on his card, as well as alerts for the purchases he makes on that card. 

The Simply Money Point is that this strategy can be an easy way to help your son build his credit and learn the responsibilities that come with having a credit card. Just make sure all three of you know what you’re getting into.

 

Responses are for informational purposes only and individuals should consider whether any general recommendation in these responses are suitable for their particular circumstances based on investment objectives, financial situation and needs. To the extent that a reader has any questions regarding the applicability of any specific issue discussed above to his/her individual situation, he/she is encouraged to consult with the professional advisor of his/her choosing, including a tax advisor and/or attorney. Nathan Bachrach and his team offer financial planning services through Simply Money Advisors, a SEC Registered Investment Advisor. Call (513) 469-7500 or email simplymoney@simplymoneyadvisors.com.

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