How Much Should You Put into an Annuity?

This is a question that has a different answer for every individual. I try to keep things a lot more open than the traditional management crowd that suggests a specific blend of stocks and bonds depending upon age and retirement needs. Some people replace stocks with annuities and some replace bonds. Some people put almost all of their money in annuities while others put none.

Most people approach retirement faced with the decision whether to make a major change to their current asset allocation. While a major change may be the right answer it is still emotionally difficult for everyone. This week I had a second meeting with one man who had seen my videos and was curious about this new approach to retirement allocation.

When we first met, he sent me specifics about his assets and spending goals for a pending retirement date of two years from now. Like every other time, I take what he writes and form a basic opinion of an appropriate course forward but that’s before we even speak. In talking to him the first time, I learned more about his personal preference and pre-conceived ideas about how to approach retirement. It’s never my job to change your mind, rather it’s my job to offer solutions that fit with your expectations.

I can give you the math all day long but it never means that my solution is what suits you. That’s why communication is the key to proper planning. I can tell you how the math works but it’s up to you to tell me how the math works for you. When someone gives me the right amount of feedback I can more properly offer solutions that not only work mathematically but also work emotionally.

Before we spoke the first time, I had already decided that this man could mathematically put 50% or more of his assets into an annuity. Big payday for me, right? But I still sat down to run the numbers just so I could verify my recommendation. My advice needs to stand up to scrutiny so I never take the math for granted and try my best to walk slowly into the eventual solution.

Before the second meeting, I ran his numbers through my spreadsheet so I could find the perfect balance of safety and growth. His income goal is relatively high in relation to assets so he needs growth and protection at the same time.

I ran the numbers through several historic scenarios and found something very interesting. Because he was saving a substantial sum for the next two or three years, an annuity would only improve his long-term outlook if he placed a modest amount in it now. If I showed him putting more money in the annuity now, his long-term profitability decreased. The right amount of protection truly did give him all the protection needed to weather any storm presented in the market over the past 100 years. Less in the annuity created a worse result as did more money in the annuity.

It pays to take chips off the table at some point, it’s just that no one knows how to identify the perfect point in time. I continue working and analyzing different scenarios to come up with solutions that work for you and recommendations that I stand behind.

Therein lies the challenge. The result for this man was based purely on the sequence of returns for his investments, but depending on what period you choose, the results were roughly similar no matter what period was used. So for this guy it made sense to put about 15% of his asset into the annuity, which would provide the security to deal with volatility while keeping the opportunity for growth that he needs.  His entry into using annuities for retirement will likely be easier than it is for most others. A relatively small financial commitment now is a much easier way to get started, so if annuities ever become a larger part of the plan, it will be a much easier transition.

How much should you put into an annuity? That all depends on assets, spending needs and risk tolerance. For everyone it is different and the results at times might surprise you like it did me in this situation. Factor in all the variables and run some numbers to see if there’s a magical allocation for you.  Almost every person who has bought an annuity from me in the past has come back to buy even more.  Once you realize it’s not that big of deal then it’s easy to see annuities are a very reasonable safe asset.  It works for retirement income, asset allocation and everything else. There is a justification for every amount but the starting point is entirely up to you.


Last Updated on February 23, 2024 by Bryan Anderson