Annuities in Retirement Planning
Monday December 22, 2008
The focus of most retirement planning is on the importance of saving for retirement. Indeed, by starting young and investing appropriately, you can have an enormous impact on the amount of money you'll have when you retire.
Still, one of the largest and most critical challenges of retirement planning has little to do with saving: choosing the best way to access your money during retirement. As a retiree, your most important objective is to ensure you don't outlive your assets. But how? Since fewer retired people have a defined benefit pension, the bulk of retirees rely exclusively on a combination of Social Security benefits and personal savings, such as IRAs and 401(k)s.
You can't run out of Social Security benefits, of course, since they're paid monthly. But it certainly is possible to outlive your retirement savings. One way to minimize that risk is to take a portion of your retirement money and purchase an annuity, since a typical annuity pays you a monthly benefit for the rest of your life.
Evaluating the endless annuity options is a tough task and has prevented many potential investors from taking a potentially important step to securing their retirement. On the other hand, the confusion inherent in these products has allowed less scrupulous salespeople the ability to sell a financial product (i.e., the annuity) that was completely inappropriate for the purchaser.
For a solid overview of some key considerations when contemplating an annuity, see Annuities — the ideal investment?
Still, one of the largest and most critical challenges of retirement planning has little to do with saving: choosing the best way to access your money during retirement. As a retiree, your most important objective is to ensure you don't outlive your assets. But how? Since fewer retired people have a defined benefit pension, the bulk of retirees rely exclusively on a combination of Social Security benefits and personal savings, such as IRAs and 401(k)s.
You can't run out of Social Security benefits, of course, since they're paid monthly. But it certainly is possible to outlive your retirement savings. One way to minimize that risk is to take a portion of your retirement money and purchase an annuity, since a typical annuity pays you a monthly benefit for the rest of your life.
Evaluating the endless annuity options is a tough task and has prevented many potential investors from taking a potentially important step to securing their retirement. On the other hand, the confusion inherent in these products has allowed less scrupulous salespeople the ability to sell a financial product (i.e., the annuity) that was completely inappropriate for the purchaser.
For a solid overview of some key considerations when contemplating an annuity, see Annuities — the ideal investment?
According to my financial advisor, an annuity is a realy good investment… for the person selling it! They get a huge commission, and you get a huge tax ammount added onto your retirement package. DO NOT waste your money on annuities! There are a lot of other places to put your money, that annuity brokers won’t be getting access to.
@Karen – thanks for commenting!
As you point out, there is tremendous incentive for advisors to sell annuities to customers who don’t need them. Still, annuities can be appropriate for people meeting criteria highlighted in the post and linked article. Ruling out annuities in all cases solely because of a high commission is an oversimplification. (When you buy a car or sell a house, you pay a pretty big commission too.)
Still, an annuity is not the place to begin investing and will hardly ever make sense in a qualified retirement plan, especially someone who has not yet retired. Since I still see too much of that, I conclude that annuities are still too eagerly sold rather than bought.
The problem I have with annuities is that no advisor has ever been able to explain annuities well enough for me to feel comfortable with investing in them. I really like the fear mongering in the third paragraph.
Those who oppose the use of annuities either don’t understand them fully or refuse to do their homework. Everyone here is talking about immediate annuities which guarantee you’ll never run out of money. How many readers would/could make that guarantee if they managed a portfolio of securities for a friend? The other type of annuity – deferred annuities – carry very handsome death benefit features (you’re beneficiaries will receive the greater of market value or your initial investment) and living benefits as well (you can be guaranteed a stream of income while you’re alive and still leave a death benefit to your beneficiaries). Of course you pay internal fees for these features, which I think are reasonable in most cases, but when has there ever been a free lunch? I’ve worked with both managed money and annuities for 30 years. They work in perfect harmony when the portfolio is set up properly. Any advisor that makes brash claims that the only one making money from an annuity sale is an advisor truly needs to take the course Annuities 101. There, they’ll get a meaningful understanding of both living and death benefits and avoid further regurgitation of the same misinformation that annuities are too expensive. They are not.