Will a financial advisor push me into an annuity?
By Seth Deal, CPA/PFS ·
It depends mostly on how the advisor is paid. A fee-only advisor is paid only by you and earns nothing if you buy an annuity, so there’s no sales incentive behind the recommendation. Advisors and agents paid by commission can earn money when you buy one. That doesn’t make the advice wrong, but it’s a good reason to ask questions before you sign.
Your pension is already an annuity
A Washington DRS pension pays you a monthly check for life, and a Plan 2 pension adds a cost-of-living adjustment each July, capped at 3%. That’s exactly what an annuity does.
So the real question isn’t whether you need an annuity. It’s whether you need more guaranteed income on top of the one you already have. For a lot of public employees, the pension plus Social Security covers the core bills. For others, especially with a smaller pension or a big gap before Social Security, more guaranteed income can make sense.
If you want more, look at DRS first
DRS sells its own annuity to PERS, SERS and PSERS members. You can only buy it when you apply for retirement, using pretax governmental savings like your DCP, or money you roll in. The minimum is $5,000, and it comes with a cost-of-living adjustment of up to 3% a year. You can see the monthly increase for any amount in your online DRS account.
LEOFF Plan 2 members have a similar option to buy an annuity through the plan at retirement.
Whatever else you’re offered, compare it with that.
What to check in any annuity
The SEC’s investor site, investor.gov, points to a few things worth reading closely in the contract.
Surrender charges apply if you take money out during the first several years. Periods of six to eight years are common, and some run ten.
Ongoing fees can add up. Variable annuities often carry an insurance charge of around 1.25% a year, plus the cost of the investments inside.
Indexed annuities may limit how much of the market’s gain you get, which is a cost even when there’s no stated fee.
Trading one annuity for another can start a brand-new surrender period.
Questions to ask the person recommending it
How are you paid if I buy this?
What’s the surrender period, and what would it cost me to get out in year two?
How does this compare with buying the DRS annuity, or simply keeping my DCP invested?
A clear, specific answer to all three is a good sign.
Where I stand
I’m a CPA and fee-only fiduciary. You pay me directly, and I don’t earn commissions on anything I recommend, annuities included. In a plan, I look at whether more guaranteed income would help you at all, and if it would, I compare the DRS annuity with the other options.
A One-Time Plan starts at $3,000. The first step is a free 45-minute Retirement Clarity Assessment on Zoom.