Annuities Create a Legacy

We spend a lot of time on this newsletter and podcast talking about micro details and specifics about certain cases. It’s easy to develop tunnel vision on one topic or another but from time to time it’s important to step back and remember the bigger picture. 

One of the most overlooked facts is that using annuities enhances an entire portfolio and it goes beyond what the annuity does by itself. Of course you should learn exactly how your annuity works but you can’t forget how it helps everything else.

Legacy as an Indicator of a Solid Retirement Plan

Legacy is not the top priority for everyone and it doesn’t have to be a focal point of retirement planning. I’m going to explain why everyone should consider it to be the best indicator of a solid retirement plan. Leave it to the kids or just spend more if that’s not your goal. 

No one should gripe about having more cash flow or making more money in retirement so everyone needs to hear this.

Comparing Annuities and Life Insurance for Legacy

Sure, there are annuities that are specifically built to produce a legacy but that’s not what I’m talking about. Using an annuity for this is fine but life insurance is a far better way to leave a legacy if you are trying to do it with one product. My point is that you will have portfolio growth that exceeds the alternative if you have guaranteed income or just some asset protected in an annuity to reduce volatility. Leaving all your money in the market might work but it will depend on the sequence of returns and timing based on the day you die. You don’t know either of those variables so you have to use an annuity to improve your chances.

Addressing Misconceptions About Annuities

Thinking that annuities can’t help is rooted in the misconception that there will be nothing left from an income annuity at the end of life. It’s partially true in some cases but there are so many remainder options available that you have a choice whether to leave something behind. Plus, it’s shortsighted to not consider what other benefits the income stream will give to your overall portfolio. This came up in a recent case and I had to illustrate this point so the husband and wife could find a compromise.

Case Study: Annuities for Retirement Income and Legacy

This couple is about three or four years from retirement and saving a lot of money in the highest earning years of their lives. They have a deferred income annuity that was purchased a few years ago and about $1M in other investments, plus the incoming savings over the next several years. There is a significant income retirement income gap waiting but they have more than enough money to solve the problem. In my opinion this case is open and shut. We determined that they could take about 40% of current investments and buy another deferred annuity to close the gap.

The Problem with the Stock Market and the Benefits of Annuities

The problem with the stock market is the sequence of returns and not knowing when your last day is going to be. If the market is volatile you get an effect called reverse dollar cost averaging and it’s a detriment to long-term performance and asset growth. Think of it in very simple terms. If you have $100K and want to draw $5K per year. If it grows 10% before you take your first withdrawal then the $5000 withdrawal equates to 4.5% of the total account value. If it loses 10% before the first withdrawal, $5000 will be 5.5% of the total account value. If you rely on the market to draw retirement

income, you will be selling stocks at a loss from time to time. Regardless of long-term market returns, the volatility along the way will have a substantially negative effect on remaining portfolio value.

Settling on the Right Strategy

In this case, I think we settled on $370K in the annuity. The remaining funds could be invested for long-term growth. In the worst 20 year period in market history, using the annuity created an additional $800,000 in portfolio value, in comparison to just using the stock market. In the volatile but profitable past 20 years, the annuity strategy led to $500,000 more portfolio value. It’s the consistency of the annuity that creates the legacy, not the stock market.

The Power of Flexibility

Yes, the wife is correct, there will be nothing left in the annuity after about 20 years, but it creates flexibility with the remaining assets and leads to a larger legacy. Now, legacy is not important to some but that’s no reason to ignore this. If you don’t want to leave it behind then spend more money and enjoy life. I’d always choose the path that makes more money but maybe that’s just me. 

Get in Touch for Personalized Assistance

If you are interested in running some numbers then I’ll show you how it looks in your situation. Everyone is different but I have no doubt it will work for you too. Book a call with me, and I’ll work through it with you.

Podcast about Annuities Create a Legacy

What You’ll Learn from This Episode:

[2:12] One often overlooked benefit of annuities is that they can improve the overall performance of your investment portfolio.

[2:28] Annuities serve different purposes depending on the individual’s financial circumstances and suitability.

[4:47] An annuity can provide portfolio growth that outperforms other alternatives when you have a guaranteed income.

[5:36] When assessing your overall investment portfolio, it’s important to consider the advantages of adding an annuity’s income stream.

[9:37] An annuity can provide a form of reverse dollar-cost averaging during times of market volatility.

[11:11]  In periods of high market volatility, annuities have the potential to deliver even better performance.

Key Quotes:

[2:47] “Legacy is not the top priority for everyone, it doesn’t have to be the focal point of retirement planning.”


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Last Updated on February 8, 2024 by Bryan Anderson