Independent Retirement Annuity: Do you need one?
The Annuity Man
Every single American citizen already owns the best inflation income annuity on the planet. Yes, even all those “annuity haters” have an annuity in their portfolio.
It’s called Social Security.
Depending on when you start the income stream, Social Security functions like a Single Premium Immediate Annuity (SPIA) or Deferred Income Annuity (DIA). SPIAs and DIAs are the same structure, but have different parameter income start dates. Social Security, SPIAs, and DIAs all guarantee income regardless of how long you live, and primarily price the payments on your life expectancy(s) at the time you start the income stream. With SPIAs and DIAs, interest rates play a secondary pricing role.
Since you already have an annuity in your retirement plan, the question is...Do you need an additional Independent Retirement Annuity as a supplement from an income standpoint or just to provide principal protection? Independent from your governmental Social Security guarantee. Independent from your employer’s retirement. Independent from your current portfolio holdings or financial advisor influence. If you need that type of guaranteed income or principal protection, then your own Independent Retirement Annuity might make sense.
Risk Transfer Creatures
Annuity products are unique financial creatures. An annuity contract is issued by a life insurance company, and is a pure transfer of risk strategy. With a retirement annuity, you are transferring the risk to an annuity company to solve for 4 primary goals. The acronym I used to describe them is P.I.L.L.
P stands for Principal Protection
I stands for Income for Life
L stands for Legacy (i.e. death benefit)
L stands for Long Term Care/Confinement Care
If you don’t need to contractually solve for one or more of those items in the P.I.L.L., then you don’t need any type of annuity. Notice that there is no “G” for market type growth.
Even though Variable Annuities (VAs) have a legitimate argument for “G” because they use mutual funds (aka: separate accounts) for potential upside....those fund choices are limited. Fixed Index Annuities (FIAs), and their army of eager agents, will pitch market growth dreams as well...but FIAs are fixed life insurance products that were designed to produce CD type returns. The bottom line is that if you want true market growth, then never buy an annuity.
However, if you want to transfer some risk, then an annuity contractual solution might be suitable and appropriate for your specific needs.
Love The Number
Independent Retirement Advice (which everyone needs) will automatically happen if you shop annuities solely for the highest contractual guarantee available. Using an objective annuity calculator (that quotes all carriers) will commoditize the process to where you are only looking for the highest number.
Whether you are looking for the best fixed annuity rates with deferred annuities offering principal protection or the highest Income Rider payment, you have to fall in love with the number...not the name of the carrier. The same rule applies if you are using a lump sum to fund a lifetime income annuity.
When you buy an annuity, you do always start with finding the highest contractual guarantee. The next step is to make sure that the claims paying ability of the issuing carrier is solid. Once those 2 bogeys meet your satisfaction, then choose that life insurance company that guarantees the contractual number that satisfies your overall long term plan.
Retirement = Guarantees
With over 10,000 baby boomers reaching retirement age every single day, most are transitioning from growth to guarantees. In my opinion, most retirement planning modules don’t have enough contractual guarantees within those model portfolios. Especially from a retirement income standpoint, most people need more pension type income to enhance their guaranteed income floor amount that hits the bank account every month.
Annuity companies are actively bidding on your retirement savings to provide that specific transfer or risk you are trying to contractually achieve. So how do you find the right companies to bid on your situation? There are only 2 questions that you need to ask and answer when shopping for annuities.
- What do you want the money to CONTRACTUALLY do?
- When do you want those CONTRACTUAL guarantees to start?
From those 2 answers, you can easily match yourself up with the correct annuity type that will provide the highest contractual guarantee. Below are a few examples of how that would work.
Answer: “I need a lifetime income stream to start within a year.” Annuity Type: Single Premium Immediate Annuity (SPIA)
Answer: “I need a lifetime income stream to start in the future, which could be 2 to 10 years from now.” Annuity Type: Deferred Income Annuity (DIA) and Income Riders attached to some deferred annuities (liked VAs & FIAs). Both DIAs and Income Riders guarantee future lifetime income streams, but take a different contractual path to get there.
Answer: “I just want to protect my principal and get a guaranteed interest rate.” Annuity Type: Multi-Year Guarantee Annuity (MYGA)
That’s how easy it is. Don’t ever let some agent or advisor say that they have a product that does everything. There is no “one size fits all” annuity type. Also...never base your decision on a hypothetical, theoretical, projected, non-guaranteed, or hopeful agent return scenario.
Don’t buy the sizzle, buy the steak. Don’t buy sales pitch dreams because you are going to own the contractual realities.
Just to pile on with one more saying, always own an annuity for what it “Will Do” (i.e. contractual guarantees), not what it might do. If you stick to that easy to remember rule, then you will be happy with whatever transfer of risk annuity type that you choose.