Former Major League Baseball player Bobby Bonilla collects a $1,193,248.20 check from the New York Mets every July 1, and he’ll continue to do so until 2035. The catch? He hasn’t played for the team in 24 years.
Bonilla scored this deal in 2000, when the Mets still owed him $5.9 million. However, the all-star player agreed to defer his payment to let the Mets invest in the team and stadium. In return, the Mets agreed to pay Bonilla back $29.8 million over 35 years — one of the MLB’s most famous deals ever.
In fact, ever since, July 1 has been known as Bobby Bonilla Day.
“For Bobby Bonilla, they’ve taken big lump sums of money [and] instead of giving [him] money up front, they’ll convert that money into a future stream of income payments,” said certified financial planner Louis Barajas, CEO of International Private Wealth Advisors in Irvine, California. Barajas is also a member of CNBC’s Financial Advisor Council.
While most investors can’t expect a deal anything similar to Bonilla’s, they do have access to a similar financial product called an annuity.
Annuities provide a guaranteed stream of income
An annuity is a lump sum of money, often taken out of a retirement plan, which is converted into a future stream of income, or annuitized. Insurance companies guarantee payments for a set period that can span the rest of your life or beyond. Payments might begin immediately or be deferred.
The allure for investors is a guaranteed stream of income, much similar to Social Security or pensions. That can alleviate fears of running out of money in retirement.
How do insurance companies determine how much money they’re going to give you? It’s based on a couple of things, said Barajas. These include the rate of return they think they can earn on the money you give them, and your life expectancy, added Barajas.
Demand for annuities has soared this year amid concerns about the economy and lingering hints of a potential recession. Annuities struck a record sale of $310.6 billion in 2022, according to estimates released by Limra, an insurance trade group.
More than half, or 54%, of savers are considering a type of guaranteed lifetime income, according to a survey by Morning Consult for the American Council of Life Insurers.
Annuities are an investment product that have benefited from record-high interest rates — the higher the interest rate, the better the monthly rate you’re going to get, Barajas said. Calculations are starting to change because companies have to figure out how to benefit the consumer and people are, on average, living longer, sometimes to age 95 or 100, he said.
“If you annuitize it, the company has to guarantee you that income,” said Barajas. “Once it’s annuitized, it’s guaranteed for the rest of your life.”
Three ways to gauge an annuity offer
Annuities aren’t for everyone, however. There are many different kinds, and some can be hard to understand or come with expensive terms and fees. There can also be restrictions and important but easily overlooked fine print, including terms that make it difficult or impossible to get your principal back if you change your mind.
Here are three ways to educate yourself before signing an annuity contract, Barajas said:
- Look at the insurance company’s reputation. You’re giving a significant amount of money to an annuity provider, so make sure it has a good reputation, including a strong credit rating from an agency, such as AM Best or Standard & Poor’s, and favorable reviews from customers.
- Vet the agent or advisor. “Don’t pull the trigger with the first person you meet,” said Barajas. Check that the person selling you the annuity has a good reputation and a clean professional history. Ideally, pick someone who isn’t a captive agent and can work with multiple companies. “I always tell clients to ask, ‘Are you working as fiduciary for me, and can I get that in writing?’”
- Consider how an annuity fits in your larger financial plan. There are no good or bad products; it’s the context, said Barajas. “What are the pros and the cons?” he said. “Every investment has a plus and a minus.” Make sure you fully understand the commitment you are about to make and talk with a financial advisor about whether other products might be a better fit for your needs.
Source : CNBC