Does Anyone Have Too Much Money to Use an Annuity?

It’s a great question that I got a few weeks ago during a meeting and it stumped me for just a second.  Dianne and Fred have saved more than enough for retirement and their income needs are modest in comparison to the total portfolio value.  They are also young, both under the age of 60, so traditional products don’t have the same value as they would for a couple age 65 or older.

I took the common approach and first showed them what a traditional income product would cost and the benefit of doing it that way.  Some people like the idea of consistency and guaranteed income annuities are convenient and worry-free.  But the cost is prohibitively expensive in many cases so alternative strategies need to be explored as well.

For Dianne and Fred, retirement spending needs amount to roughly 3% of their total portfolio value.  At that level a traditional income annuity would be affordable but given their young age I don’t feel it’s the best option for them.  So I took them through several other strategies for producing retirement income that included use of bonds, growth and dividend stocks.  Each has benefits and disadvantages so we spent a lot of time talking about the potential for every scenario.

One option I showed had them staying 100% invested in the stock market.  For anyone with higher spending needs this will show potential disaster in times with serious market volatility.  But Dianne and Fred saw that their portfolio would have survived some of the most volatile periods in past market cycles.  This is when Fred asked if there was ever a time when someone has too much money to use an annuity.

My answer is simple.  Yes, there are plenty of times when a traditional income annuity is not necessary.  But there are always other reasons to use annuities.  In situations like this when someone has more than enough for a comfortable retirement it’s more about risk tolerance than anything else.  Lots of people have enough assets to weather any market downturn but seeing a portfolio cut in half might not be all too settling, even if a long-term simulation shows portfolio recovery.

Dianne and Fred are investigating the use of annuities in retirement because they want to reduce volatility.  That’s exactly what a deferred annuity can do.  Bonds are the traditional choice for people that don’t buy annuities but an annuity has a decided advantage when consistent withdrawals are part of a retirement plan. 

Annuities are meant for reducing risk in retirement.  Insulating a portfolio from market losses allows you to maintain more of your principal balance and increases long-term growth potential.  When the market drops it takes less time to recover if your whole portfolio didn’t take a hit.  That means you get to move forward and start growing sooner.

Lots of people who have more than enough money and still use annuities.  I would honestly say that many of my clients don’t even need annuities but choose to use them for one strategic advantage or another.  Guaranteed income products are fine but there is usually a better way.  If you have saved enough for retirement and don’t like the idea of a lifetime commitment or fees that erode your investments then you may want to look at an alternative use for annuities no matter how much money you have.

If asset protection, liquidity and growth are of concern to you then a simple alternative may provide what you want. Feel free to call, email or get on my calendar below.



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Last Updated on February 1, 2023 by Bryan Anderson