0012. The 3 Generations of Annuities

Financial Independence Now

In Episode 12 of the Financial Independence Now podcast, host Randy Luebke, discusses the topic of annuities, clearing up many common misunderstandings surrounding them. He compares annuities to familiar financial instruments like Social Security and company pensions, emphasizing their importance of considering the use of annuities in retirement planning.

The episode details 3 Generations of Annuities:

The First Generation Annuities (Gen1), or Fixed Indexed Annuities, are likened to certificates of deposit (CDs), where the investment is tied-up for a specific period of time. The interest paid is guaranteed and the principal is 100% protected from loss of value. The difference between the CD and the Gen1 Annuity is the Gen1 Annuity also provides tax-deferred earnings.

The Second Generation Annuities (Gen2), known as Variable Annuities, invest in stocks, bonds, or mutual funds. Gen2 Annuities offer the potential of higher earnings but they generally do not offer guaranteed earnings of principal protection. Also, Gen2 Annuities almost always come with higher fees.

The Third Generation Annuities (Gen3), also referred to as Fixed Indexed Annuities, combine the safety and guarantees of Gen1 Annuities, along with the growth potential of Gen2 Annuities. Gen3 Annuities are flexible. They offer low to no fees, as well as income rider options. The income riders provide a guaranteed amount of income distribution, generally for life. However, the principal is never surrendered, providing access to lump-sum distributions as well.

The episode underscores the importance of understanding the different types of annuities, Gen1, Gen2, and Gen3, and the importance of evaluating their suitability based on individual financial goals and risk tolerance and utilizing available resources to make informed financial decisions.