Much of the work I do and the strategies I have created are based on debunking popular myths about annuities. Not all contracts do what Ken Fisher warns against and most people trashing the products are only trying to sell magazines or another financial product. Everything has a negative side so you have to keep an open mind and consider the motivations behind any source.
Several weeks ago I wrote about liquidity being one of the biggest myths about annuities. Sure, some of them have restrictions and I’ve consistently advised you to avoid lofty promises and focus on fundamentals. Doing so will uncover the contracts that give you no more than the benefits you need and a simple plan free of complexity.
There’s more to the liquidity issue, so much more in fact that looking at it from a different angle might reveal a conservative strategy with excellent long-term growth potential. In case you didn’t know, I like to tinker with numbers. Playing with ideas and testing scenarios for me is just like a kid who is addicted to video games. But I like to think that the results are much more productive.
The idea behind this comes from several sources. I learn something from everyone I meet and each experience gives me the opportunity to serve the next person. People who have worked with me for years get the added payback in the form of improved ideas and strategies. Staying on the cutting edge and being able to pivot and change over time is probably the most important aspect to consider when planning for retirement.
The biggest inspiration for all of my ideas comes from the people who call to say they bought an annuity that isn’t working out. Either the performance isn’t that great or in the worst case the contract has components with a purpose that was not properly disclosed to the purchaser. Situations like these give rise to the sentiment that someone feels “stuck with an annuity.”
Unless you buy something completely dysfunctional, no one should ever feel stuck with an annuity. The 10% free withdrawal gives you more than enough to draw spending money or to even ladder your investment out to other opportunities. It may not seem like a lot but have you sat down with the numbers to see what it actually looks like? I have, and you may be surprised at the results.
For years I have been dealing with people who expect rates to rise. Never mind the economics required for an inflationary environment, rates are low, have been higher in the past so it stands to reason they are going higher again, right? Maybe, but that’s no reason to be sitting around earning nothing. If you accept a long-term rate lower than what you’d like, you can take the free withdrawal and ladder into the rising rates. The result is a higher long-term average than what you’d get by waiting for a mythical interest rate. And in the past, many have found out that the low starting rate was better than anything in the later years because rates kept dropping.
That idea is nothing new. Other people have been talking about that for a while but like everything else I took it a step further. Several months ago I realized that most retirees are taking on more risk than they’ve ever had. It has nothing to do with asset allocation but it has everything to do with retiring right now with more assets than you’ve ever had and a stock market that is at its highest point ever. The implications of having more assets exposed is also greater because you are also thinking about not just growing but living off of those assets. The game has changed completely and the stakes never higher.
So, everybody wants a better yield but nobody wants to take risk. Here’s an idea: instead of laddering into higher rates, protect some money with an annuity and use the free withdrawal to ladder incrementally back into the market. It takes a substantial amount of risk away from a portfolio now but also proves that dollar-cost-averaging back into the market creates some excellent returns. What’s interesting is that I’ve run the free withdrawal reinvestment scenario across several time periods and results are similarly impressive in all examples.
In good market periods you would have done better by leaving it all at risk and in bad market periods you would have consistently purchased at depressed values, which would enhance your yield. In either case you will see yields that far exceed what any annuity can do alone and it’s exactly the kind of performance that everyone has been saying they want.
All annuities offer protection, even the ones I don’t recommend buying. If you feel stuck with a contract, don’t just sit there and do nothing about it. Of course if you use an annuity that performs well then the whole idea could be a good way to move forward into retirement while protecting all you’ve earned without sacrificing future potential.
I definitely have numbers to support this theory. It’s something I’ve kicked around for about six months now and it’s been tested in hundreds of different scenarios. But I can’t give away all my work for free so if you’d like to see what it can do then drop me a line and we can run it with your parameters.
Enjoy your weekend!