As I have written in many of my columns, I am a great believer in developing an asset allocation strategy for retirement investment portfolios. Your financial adviser should have discussed this technique with you already, and if he or she has not, you might ask them why not.

In developing such an allocation strategy, the first question to ask is: how willing are you to take investment risks in your retirement portfolio? If you are unwilling to take any risks whatsoever, then your investment allocations should be in ultra-safe investments, such as laddered CDs, conservative bond funds, money market accounts, treasury instruments, or fixed annuities. Even if your risk tolerance is moderate (meaning you are willing to assume some investment risk), more than likely a portion of your portfolio should be in fixed dollar investments.

Fixed annuities have long been popular with middle-aged investors. An annuity is a type of contract that is issued by an insurance company. Annuities come in different varieties, such as fixed, variable, and equity-indexed. With a fixed annuity, the money that you contribute to the contract is your premium payment, and that payment may be made in a single sum, or paid over time. Single sum fixed annuities are referred to as single premium deferred fixed annuities, and once your premium has been paid, the insurance company should offer some sort of interest guarantee on your money.

I was taught in Sunday school to honor my father and mother, and you should honor and base all of your annuity buying and ownership decisions on the contractual guarantees from the issuing company. Annuities should be regarded as non-correlated assets within your retirement portfolio, which means that their value does not rise and fall like your other investments may due. Annuities that are providing lifetime income transfer the risk of your living too long away from your portfolio to the life insurance company.

Annuities that are not in a qualified plan offer two very important income tax advantages: first, the interest earnings that are credited to your premiums are not reportable as income to you during the accumulation phase of the contract. This is the phase of the contract in which your premiums are earnings interest and growing in value. The other tax advantage of fixed annuities that are not in qualified plans is the manner in which periodic withdrawals are taxed. If the contract is annuitized, which means the accumulated value in the contract is withdrawn, generally, over your remaining life expectancy, a portion of the income is non-taxable, and a portion is taxable. Annuity income can also come with additional guarantees so that you can pass along values to beneficiaries in the event of your premature death while in the annuitization phase.

Far too many annuity sales people hype the fact that, since annuity taxation during the accumulation phase is deferred, annuity earnings do not count as earned income, thereby perhaps reducing the taxable portion of your social security benefits. Buying an annuity solely for this reason is a mistake.

If you simply utilize the annuity as an accumulation vehicle, and you subsequently terminate or surrender the policy after a period of time, the gain in the contract is taxable to you, and capital gain treatment is not available.

There are certain considerations that you should be aware of in considering a fixed annuity: First, the financial ratings of the issuing company are very important, and the primary insurance rating agencies are: A.M. Best, Moody’s, S&P and Fitch. Don’t be distracted by over promises from agents representing companies with poor rates. This is currently happening in the indexed annuity world, and has the industry concerned enough that some states and regulatory bodies have started investigating the stability of these carriers and their ability to back up their contractual promises

The interest guarantee – usually these guarantees are higher than current CD rates. Remember that the guarantees are what you should be focusing on, not the illustrated rates in the proposals. If it sounds too be good to be true, it probably is.

The surrender penalty period – this refers to the period of time that your money must remainder in the annuity contract before you can terminate the entire contract without the insurance company charging you a termination fee. Here, a shorter period is better, but often, higher rates of guaranteed interest are made available if you are willing to forego dipping into your annuity values until the surrender period expires. Many annuity contracts allow you to withdraw up to 10 percent of your current value each year, but these withdrawals are taxable, if your annuity has generated any gains before you withdraw any monies.

Finally, ask your agent or adviser to shop around for you, and when he/she has recommendations, ask questions and don’t be too quick on the trigger to say yes. Better to take your time and be sure.

Got a financial planning question for Greg? You may email him at

Greg Roberts is a certified financial planner with 35 years of financial and estate planning experience.