Do you have an Annuity Retirement Plan?
The Annuity Man
If you are constantly working on retirement planning, then part of that plan should be addressing the retirement income part of the overall strategy. Because annuities are the only financial product on the planet that contractually guarantees an income stream that you can never outlive, you might need to actually implement an Annuity Retirement Plan.
Lifetime Income Foundation
With over 10,000 baby boomers reaching retirement age every single day, guaranteed lifetime income is the primary focus for most Americans heading toward the “2nd Chapter” of their lives. Annuity income stream guarantees originated in the Roman Times as a gift to the dutiful Roman soldiers and their families, and those “annuas” (Latin for payments) are the origin of the word...annuity. Today’s Single Premium Immediate Annuity (SPIA) is pretty much the same structure as that first “Roman Annuity.”
Annuities are a life insurance product and are still the only financial product that contractually solves for longevity risk...or outliving your money. It’s a monopoly and a benefit proposition that only annuities can offer. The fact that most people do not equate annuities with lifetime income is a direct reflection of the horrible branding strategies of the annuity industry. Most industries that have a monopoly would pound that unique message in the mind of the consumer. If I was appointed “Annuity Czar” for the industry, you can bet that’s what I would do!
Social Security and Friends
One of the biggest hypocritical statements ever is when people say that “hate all annuities,” yet still enjoy receiving their Social Security payments. Annuities pay a lifetime income stream that you can never outlive. Social Security provides a monthly income stream that you can never outlive. So the logical and factual progression is that Social Security is an annuity.
I always love to point out that every single working American citizen owns an annuity, it’s called Social Security. In addition, it’s also the best “inflation annuity” on the planet because the income increases are political...not actuarial.
Most people in retirement or headed that way are looking to establish a guaranteed income floor. That is the monthly amount that hits your bank account regardless of what happens in the world. Social Security payments, pension payments (if so fortunate), and annuity payment guarantees would be examples of your income floor and a prime example of a legitimate Annuity Retirement Plan.
Risk Transfer Monopoly
Annuities are, in essence, transfer of risk strategies. You are transferring the risk to the annuity company instead of shouldering that risk yourself. If you are looking at annuities as potentially being a part of your overall plan, then it’s important to know that they primarily solve for 4 specific goals. The acronym P.I.L.L. is what I use to easily remember them.
P stands for principal protection
I stands for income for life (or specific period of time)
L stands for legacy
L stands for long term care (confinement care)
If you do not need to contractually solve for one or more of the 4 items in the P.I.L.L., then you probably shouldn’t have an annuity in your retirement plan. It’s really that simple.
In my opinion, annuities should never be purchased for stock market type returns even though long surrender charge products like Variable Annuities and Fixed Indexed Annuities are unfortunately pitched for just that. Variable Annuities have a small “market return” argument, but your fund (separate account investment options) choices are limited. There should be no limits if you want market type returns.
It’s important to point out that the majority of annuity types offered are classified as fixed annuities, and regulated at the state level.
The great part about having a guaranteed income stream and payments that you can never outlive is the fact that there is no ROI (Return on Investment) calculation until you die. Up until that point, it’s a pure transfer of risk. Lifetime income payments are primarily priced on your life expectancy at the time you take the payments, with interest rates playing a secondary role.
If you are putting an Annuity Retirement Plan in place or as a portion of your overall plan, you need to determine what specific type of annuity best solves for your situation. There are only 2 questions that you need to ask and answer to determine what type of annuity will provide the highest contractual guarantee for that specific goal (i.e. P.I.L.L.).
- What do you want the money to CONTRACTUALLY do?
- When do you want those CONTRACTUAL guarantees to start?
From those 2 simple answers, you can then match up with the type of annuity needed to contractually achieve your long term plans.
Plane Ticket Pricing
When most of us go to buy a plane ticket, we just want the best price for the exact trip parameters needed. Unless you are trying to get points with a specific carrier, then you could care less which airline is offering the best price. You just want the best deal you can find. Shopping for retirement annuities, regardless of type, should be approached the same way.
Just like using Orbitz and Priceline, you need to use an annuity calculator that objectively shops all carriers for the best price. After finding the best retirement annuity rates for your situation, then you need to look at the ratings and claims paying ability of the issuing carrier. Annuity contracts are issued by life insurance companies so your research needs to start there because you are transferring that specific risk to the issuing life insurance company.
Are annuities a good idea for retirement? The answer is yes, but only if you are trying to achieve a specific contractual goal. When you save for retirement using a tax deferred structure like a Traditional IRA or employer sponsored plan, the primary goal is growth on your money. That changes when you approach or are in retirement.
The bottom line is do you want to shoulder the risk or transfer the risk. If transferring some or all of the risk is your new goal, then you might need to put together a customized Annuity Retirement Plan.