Annuities in the U.S. are primarily purchased for two reasons. First, if someone wants to move a lump sum and they don't need it until retirement, they move this lump sum into an account that can never lose money. Over time, they turn 65 or 70. At that point, they can elect to get a monthly check guaranteed every single month, or until they die. This is called lifetime income. There are all kinds of lifetime income benefit riders that you can attach to annuities.
The second main way to use an annuity is to keep a bucket of money safe from market risk. Typically, the way annuities work is you are incentivized with a bonus to move your money. Let's say that your product does have a bonus, so that is kind of a signing bonus, so whatever the percentage is they'll give you a signing bonus for you letting them have your money for retirement. Let's say that you're meeting with a client and they roll $100,000 into an annuity. You know the company might hold onto their money for 10 years and then they'll give them a 5% signing bonus for trusting them to let them have their money. The reason they're able to do that is because you are basically getting an annuity that is not a liquid play, it's a long-term retirement solution. It is just a way to keep your money safe.
The first way was the lifetime income guaranteed option and the second option is called in college principal protection or moving a bucket of money they can't lose money. In college, they reach the law of 100. That is when you take whatever age you are, and believe that number is the amount of money that you should have into an account that doesn't lose money. For example, if you are 33 years old you want 33% of your money in a relatively safe investment. 100 minus 33 is 67, so 67% of your retirement dollars should be in what is called a risky investment annuity. Annuities are not risky investments.
Typically, people over the age of 50 don't want to lose any money because they don't have the time to take the risk that a younger person does. If you know you don't want to worry about losing money, you put money into either a fixed rate of return or an account that gets a percentage of what the market gets with no downside risk. You are participating in the gains but not in the losses. Zero is your hero.
The bad thing about annuities that you read on the Internet deals with liquidity, so that ability is a terrible investment. Let's say you have $100,000 and you want to get a fair rate of return on that money next month. This is a terrible program because you're signing a long-term commitment that is designed for people that don’t need the money for five years, 10 years or whatever years you are talking about. Because of that, you're being able to lock in interest rates, and you're being able to participate in market gains with no market losses so there's all kinds of annuities. There's fixed, there's index, and there's variable with variable annuities. You can lose money, but The Alliance only does fixed and indexed annuities. Basically, an index means you can't lose any money but you can get a percentage of the gains and fixed, it's just at what the fixed rate is. A lot of people use annuities as a way to diversify their retirement dollars and put it in an account where they can't lose money. They don’t have to worry about it, they can rest easy at night knowing that if the market crashes or another event like 9/11 or the COVID-19 pandemic happens their retirement dollars are safe inside of an annuity.
