Why Retirees Like You Own Annuities?

Because, your main annuity that you receive from Social Security on average, only pays you 40% of your pre-retirement income.¹ Social Security makes it pretty clear when they state…

“Social Security Should Be Just One Part of Your Retirement Plan.”

There are a number of things that are important for you in your retirement. Things like:

• Being active
• Leisurely enjoyments
• Hobbies
• Volunteering
• Purposeful living

When it comes to your finances, PROTECTION is the most important thing to you. You must have a plan to protect your:

• Income
• Assets (home, investment/retirement accounts)
• Savings (bank accounts, CD’s)
• Health (physical and mental condition, healthcare, long-term care)

Annuities can help solve for some or all of those protection needs.

Annuity Benefits — Done Right, They Provide Certainty For You

• Guaranteed Income For Life & Low Risk — You will get a contractual guarantee from the annuity/insurance company as to when your payments are going to start, end and how much they will be each month, quarter or year. YOU WILL NOT OUTLIVE IT! Unless you choose to a fixed term (period certain) like 10 or 20 years.
• Modest Growth Potential — Depending on the annuity you choose, you can grow the original principle amount. But, don’t buy for market return. You want market return? Invest in the market.
• Principle Protection — An annuity can prevent you from drawing down too fast and too much of your retirement savings. An annuity is insurance for your income and assets…especially if you live a long time. 
  • Don’t have worry about future market downturns when you are retired.
  • May help your existing investment grow more as compared to you using only your retirement savings for income.
• Inflation Protection — You can add in inflation protection to your annuity with an Income Rider or COLA (Cost Of Living Adjustment) Rider.
• Inheritable — Any remaining balance in your annuity can be passed on to your heirs…and you thought the insurance company was going to keep it all (yes, there are some annuities where this can happen, but those are not the norm anymore).
• Creditor Protected…Shields Your Assets — Can be exempt from creditors
• Medicaid Friendly — Immediate Annuities may be used to offset a Medicaid spend down (see your Elder Care attorney for more info).
• Long-Term Care — As mentioned in the LTC section, annuities can offer long-term care benefits.
• Conservative Tax-Deferred Accumulation — With a Fixed Index Annuity you are able to earn interest tied to the performance of an external market index, such as the S&P 500, without ever being invested in the market. The gain or interest you earn is tax-deferred until the time of withdrawal.
• No Market Downturns (Avoid A Volatile Stock Market) — With a Fixed Index Annuity, you  are not subject to downturns, declines and depressions in the stock market and economy. Your annuity will not go down in value!
• Transfer of Risk & Risk Pooling — When you purchase an own an annuity, you are transferring potential loss of income and assets to an insurance company. It will be their responsibility to make sure you are paid your contractually agreed upon income for life. The annuity company takes into account the average lifespan of people and the average historical market and investment returns to guarantee you receive income for life (or period certain)…no matter how long you live. There’s no guarantee that Social Security will keep up and that you won’t draw down and exhaust your savings and investments before you die…you could very well outlive your savings and investments. But, you can’t outlive a Guaranteed Income for Life Annuity.
• Certainty & Peace of Mind — You can’t predict the following:
  • Whether your Social Security income will keep up with inflation and your retirement lifestyle. Just ask people on Social Security to see what they think.
  • How much your retirement savings and investments will grow (or lose) in the future.
  • If there will be a major stock market crash that adversely affects your retirement savings and thus your retirement income and thus your retirement standard of living and lifestyle.
  • If there will be a real estate market crash that adversely affects you. Imagine planning on selling your home and using the proceeds to move into an assisted living facility and the real estate prices drop by 20% or more (which they should as of this writing in March of 2022). Now what?
  • How much your taxes may go up.

On the other hand, with the right annuity, you can predict to the penny at least some of your retirement income. Income that can go towards your basic costs of living…like groceries, gas, utilities, and healthcare.

The Three Main Challenges With An Annuity

Should you consider an annuity, you must also know the main challenges with an annuity.

• Surrender Charges — If you ever wanted to cancel or withdraw some funds from the annuity, you could and will likely incur surrender charges. Typically, the earlier in the contract you withdraw funds, the greater the surrender charge.
• Potential Loss Of Growth & Buying Power — If you purchase an annuity, while those funds are secure, can earn a rate of return and will not suffer from market downturns; they will not reap the benefits when there are high returns in the stock market. 
• Non-Liquid Asset — It’s not as easy to get funds from your annuity as it is from your bank and investment accounts.

See these for an academic defense of annuities:

• https://www.nber.org/system/files/working_papers/w22853/w22853.pdf
• https://moshemilevsky.com/

Question: So, what about you? Should you buy and own an annuity? After seeing ALL the ways you can benefit from an annuity and understanding the very few downsides of owning an annuity—does this mean an annuity is right and best for you?

Answer: Well, that depends. 

1. Are you suitable for an annuity and is an annuity suitable for you?
2. Do you have enough liquid assets to purchase an annuity? The annuity industry has a general rule that you spend no more than 50% of your investable assets into an annuity. I would recommend you start with around 20% and go from there if necessary. 
3. How long do you plan to live? This can be really important! 
   • The better your health and the better you take care of your health…then the more advantageous an annuity is for you. You see, the insurance company bases your annuity payment primarily on three things: (1) the age you plan to start receiving payments, (2) your gender (3) the current life expectancy of someone your age and gender.² Based upon mortality tables, they can estimate their total payout to you from the time you start receiving payments until you die. If you live past your life expectancy, then you are in essence collecting more money than the insurance company expected to pay you…thus increasing the return on your initial premium. The idea is to live longer and collect payments longer than the annuity company predicted and planned on. The longer you live past your life expectancy, the more an annuity benefits you.
   • However, if you have health issues, a chronic illness (diabetes, heart disease, lung disease, etc.), you’re obese, you’ve used tobacco, you’ve abuse alcohol or drugs; then the shorter your life expectancy and the less advantageous an annuity is for you. But, even with a shorter life expectancy, an annuity may still benefit you.
4. Are there other financial and health products that would be more important to invest in? Like, long-term care insurance or life insurance?
5. Is there a suitable alternative to an annuity that would work for you and you would be comfortable with? See Annuity Alternatives for more info.

You can of course, schedule a call with me to discuss.

Sources

1. https://www.ssa.gov/benefits/retirement/learn.html
2. https://www.ssa.gov/oact/STATS/table4c6.html

Important Notice: The information published on this web site is first and foremost, educational in nature and is not intended to be a recommendation to purchase an annuity or any specific insurance or financial product. You are strongly urged to consult with financial planning, tax, and legal advisors to determine if an annuity is suitable in your financial situation. Annuities are not deposits of or guaranteed by any bank and are not insured by the FDIC or any other agency of the U.S. government. All annuity guarantees are subject to the financial strength of the insurance company.