The Value of Annuities in Retirement Planning

Today, we’re going to talk about retirement planning and the case for annuities. There was a recent article in the Wall Street Journal titled “The Case for Replacing Some Bonds With Annuities“. The first line says, “Unless you die relatively young, income annuities will give you more retirement spending power than bonds, some economists say.” So, let’s talk about why placing a portion of your money in annuities might be a good idea for your retirement planning.

Annuities provide protection against one of the most significant risks that retirees face — longevity. As the article points out, it’s not necessarily something we’d recommend for someone who is very ill or has a shorter life expectancy. However, annuities can provide protection against that very significant longevity risk.

When people face retirement, there are many different risks that they need to plan for. Number one is market volatility. The swings in rates of return on an investment portfolio can do devastating things to someone’s retirement, especially if they’re withdrawing from an investment portfolio during years where the market goes down, like in 2008 and 2009, when you might have pulled out a lot of money. An annuity provides protection against that downside risk.

More and more people are living longer and longer. Annuities also provide protection for someone living to, let’s say 103, like my wife’s grandmother.

It also provides protection against interest rate risks. If interest rates go up, bond values will go down, but the annuity will continue to provide. It’s guaranteed income for life.

One thing that a lot of people should consider is how they can combine both their annuities and their life insurance to get a better result. So, for instance, if I had a million-dollar investment portfolio and I wanted to leave that million dollars to my heirs, I would be relegated to taking just the income each month or year from my investment or bond portfolio, because if I took any of the principle, my legacy value would go down. But if I combined the annuity with life insurance, I then can create a situation where I could take the maximum stream of guaranteed income for the rest of my life.

Let’s say I’m 65 years old and I’m about to retire and don’t want to take any risk on my investments, so I invest in fixed income bonds. I really can’t get a lot of interest from that — maybe, 1-3%. For a 65-year-old, a lifetime income annuity could provide around $55,000 on a million dollars in this low-interest-rate environment. And that $55,000 is guaranteed for the rest of my life. But if I died right away, I would either have a cash refund type of annuity or if I wanted to get the maximum from it, I would have no survivor benefits with that annuity.

And that’s where life insurance comes in. I can then use the life insurance to replace what was consumed by the annuity. This way I’m protected against the market risk and the longevity risk, guaranteeing myself that $50,000 – $55,000 a year while still providing legacy value to my children or my heirs.

Take a look at this article. It’s really a worthwhile piece to explore with a percentage of your portfolio because the more guaranteed income people have in retirement, the lower the stress they have throughout that period of time. Knowing that you’re getting your social security check and your monthly check from the annuity could make it much less stressful for you to deal with the financial ups and downs of a volatile stock and bond market.

If you’d like to discuss this concept in more detail or if you have any questions, I encourage you to give us a call or send us an email. We’d love the opportunity to be of help to you.

Registered Representative offering Securities through American Portfolios Financial Services, Inc. (APFS) Member FINRA/SIPC. Investment Advisory Services are offered through G&G Planning Concepts, Inc. which is not affiliated with APFS. Strategic Wealth Advisors Network and Gassman Financial Group are not affiliated with APFS.

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This material is for informational purposes only. Neither APFS nor its Representatives provide tax, legal or accounting advice. Please consult your own tax, legal or accounting professional before making any decisions.American Portfolios Financial Services, Inc.(APFS) and American Portfolios Advisors, Inc.(APA) are not affiliated with any other named business entities mentioned.