Annuities are neither good nor bad, but you wouldn’t know, given the way most people, including financial planners, react when the product is talked about as a potential part of a retirement plan. salespeople, some of whom have engaged in unethical sales practices, to earn a hefty commission, and that’s the familiar version.
Planners and others also frame these products in the worst way. They label income annuities as an investment rather than a guaranteed way to finance spending during retirement, as a way to manage the risk of running out of money in retirement, which is often cited as almost everyone’s top concern. early retirees and retirees. . And those critics tend to focus only on the negatives associated with annuities. They say, among other things, that you give up control of your money when you buy an annuity. Meanwhile, there has been a significant decline in consumer perception of the value of guaranteed lifetime income during the pandemic, according to a report, Diverging Attitudes About Lifetime Income in the COVID-19 Era, published by Greenwald Research and CANNEX. The percentage of consumers who considered guaranteed lifetime income to be very valuable fell from 71% in February to 63% in August, the lowest point for this statistic in the past three years. For his part, Michael Finke, a professor at The American College of Financial Services, attributes some of the hatred of annuities to opportunistic messages from some who see them as competitors to managed investments. And others believe that annuities are not so hated as they are misunderstood. “I don’t think they hate what an annuity can do for them in a financial plan,” said Tamiko Toland, director of retirement markets for CANNEX. “I think there is a lot of confusion about the different types of annuities and the wide range of value propositions they offer. This can be compounded by a poor understanding of the true value they offer and the true cost and risk of offering them. “But in the right circumstances, annuities provide value. For example, an annuity might be appropriate for those who do not want to survive. your assets. Depending on the type of annuity purchased, an account holder would receive income for as long as he or she lives. Yes, this means that some annuity owners will receive more income than others. But the true value of annuities comes from something called “mortality credits. “These credits, according to AnnuityFYI,” are created when people die earlier than expected and do not receive as many income payments as they would if they had lived their entire life expectancy. That money goes to a common fund that It will then pay lifetime income to those people who live longer than their life expectancy. It is worth noting that those who choose to own only investment. Ones (stocks and bonds) as a way to generate income during retirement do not receive mortality credits. “Think of simple income annuities as taking bonds from your savings account and turning them over to an insurance company that will pay you an income for as long as you live,” Finke said. “The alternative is to pay your own expenses with these bonds, but the problem is that you don’t know how long you will live. You can spend very little to make sure you never run out, or you can spend more and risk outliving the savings. The price of an annuity is that the income is approximately equal to the amount that you could otherwise spend if you were to withdraw money with interest from the savings until your expected longevity. An annuity allows you to spend more without worrying about running out of money. “Simple income annuities also work if you are trying to match guaranteed sources of income for retirement, such as Social Security and defined benefit pension plans, (both are annuities) with their essential expenses. Today’s retirees cannot depend on pensions for a basic lifestyle, Finke said. This means there is often a gap between how much you have to spend on necessities and how much you will receive from Social Security And, if you’re lucky enough to have one, a defined benefit pension. If you’re looking to match your guaranteed sources of retirement income to your essential expenses and there’s a gap, you could fill that gap in one of two ways: with income. from your investments or with an income annuity. And if you subscribe to what’s been called the four-box strategy, you’ll know that those two tactics have very different risk management objectives. In the case of using investment income, say the 4% rule, it could provide income that, on paper, keeps up with inflation. But that tactic offers no guarantee that you won’t run out of money or, more accurately, that you will have a lower standard of living if you live long. In contrast, an annuity manages longevity risk; you will never run out of money. But the income from such products will not keep up with inflation, unless, of course, you buy an inflation clause. So what is a person to do? At best, when creating a retirement income plan, you need to have all the tools in the toolbox and use them properly. No carpenter gets to work without a hammer and screwdriver. So why should you create your retirement income plan without all the tools available to you? So, for example, you don’t need to buy an annuity if you have enough assets to fund your desired standard of living throughout your life. On the other hand, you might consider an income annuity if you want to guarantee a desired minimum standard of living. Or you could consider using a deferred income annuity or a qualified longevity annuity contract, which would allow you to use an investment income strategy through age 85, for example, and an annuity strategy to manage longevity risk. Or perhaps you could consider a “term annuity” or one with other riders that provide income to a surviving spouse or return of principal. And it doesn’t have to be one or the other. It could be a combination of risk assets and annuities. Again, we are not advocating the use of annuities all the time or never. Rather we are advocating an open mind; that annuities are used when facts and circumstances dictate that such products would be appropriate. Of course, there are reasons why you may not use such products in today’s environment. At the moment, income from an immediate annuity may be low. For example, a 63-year-old man who spends $ 100,000 on an immediate annuity, with a refund at death, today could expect to receive $ 400 a month for the rest of his life, or $ 450 without a refund at death. However, Finke notes that annuity prices are fair compared to the cost of generating income from other safe investments like CDs or bonds. “We found that annuity prices are very competitive, with guaranteed income slightly higher than the cost of generating income for one’s expected longevity using Treasuries. There is simply no way around the fact that secure income today is expensive, whether you use annuities or bonds. At least annuities allow you to spend your savings without worrying about them running out. “So how could you further investigate whether an annuity might make sense for you? How can you find a safe place and / or someone you trust to What should you look out for? First, rethink your view of annuities. “If we called income annuities ‘personal pensions,’ which is what they are, people would be more comfortable buying one,” Finke said. Then spend some time learning more about annuities.Some websites to visit include: The Alliance for Lifetime Income, which recently published the second edition of its Annuity Language Glossary, Stan “The Annuity” Man, Flat Income; Income Solutions Three, think about the retirement income goals you are trying to achieve and the risks you are trying to manage and mitigate. Ask yourself what you want from an annuity, Finke said. are you a personal pension? If so, he recommends buying an immediate annuity now or buying a deferred annuity that starts when you’re 75 or 80 to ensure you don’t run out of cash. Do you want access to your cash and the opportunity to grow, but possibly higher expenses? So consider, Finke said, a variable annuity, although its complexity means you have to shop around. And if you’re working with a financial advisor, Tolland said there are two elements to consider: Understanding the role of the financial professional providing a recommendation and their obligation to you, as well as the role of any annuity within an overall plan. And no matter what, Finke said, “never buy a product you don’t understand.”