Marketwatch recently published an article on annuities that is worth reading for one simple reason. It will highlight the reasons why it’s so hard to make retirement decisions when annuities are involved. This article has received a lot of attention and Marketwatch has been running it for a few weeks now so it seems as though people like it. I’ll explain the important points of this article and give you a link to it at the bottom.
The premise of the article centers on the long standing question of whether to annuitize in retirement, which means exchanging a portion of your assets for guaranteed lifetime income.
It’s important clear up some confusion from the beginning. The article uses the term “annuities” and refers only to single premium immediate annuities which is a specific type of contract. “Annuities” is a general term that can include immediate, deferred, fixed, variable or indexed. Some are for income and others are for growth. When referring to information in the article I will change the term to “income annuities” in order to be as specific as possible.
While the article does not draw any specific conclusions, it contains useful information because it does point out a couple considerations that need to be used in retirement planning. When making allocation decisions it’s important to have a basis of comparison so you can recognize the best deal when you see it. This is a stumbling point for a lot of people that see one or two options and don’t know if there is something better available.
Starting with a good academic debate should help put some building blocks in place. If a consensus on using annuities does not exist then it is up to you to determine how and why to use them.
The article lists two particular issues with using income annuities in retirement. You may notice I have dedicated newsletters to each of these topics recently so I’ll paraphrase below.
The article equates lifetime income annuities to long-term bonds. Although the income insurance from an annuity is a distinct advantage, the two investments are similar from a wealth-building and allocation perspective. (Newsletter Aug. 8, 2018)
What I took some time to illustrate two weeks ago is clearly stated in the article. Income annuities do not offer true inflation protection. (Newsletter Nov. 10, 2018)
Interest rates and inflation are what I consider to be fundamental variables. Both are present in any planning situation and should be accounted for but cannot be controlled.
I spend time in print and on video talking about the five keys to retirement planning, which are Income, Market Volatility, Inflation Protection, Control of Assets and Legacy. The fundamental variables working for and against you allow you to test the viability of a plan based on how it will help meet goals.
Guaranteed income annuities eliminate market volatility on assets and provide income payments for life. But they expose you to inflation, take assets out of your control and leave nothing for the next generation. Each of the five keys has a different level of importance for every individual. That’s why there’s no consensus on any financial product. Some people love the assurance of steady income while others want as much growth as possible and don’t mind some volatility.
The academic debate over this subject has been going for decades and I’m going to tell you why no one agrees on the right answer. Too much time has been spent on arguing over whether to annuitize and if so, how much of one’s assets should be used. Annuities are not only used for income so adding an additional list of options for asset protection would certainly increase the likelihood of finding a solution.
A contributor to the article states, “It is easy to criticize annuities if you are not required to provide an alternative approach that guarantees one will have sufficient income in the event one lives to 100.”
I don’t mean to criticize income annuities and happen to know of several instances where the product fits well in a plan. But you should know by now that this entire website is dedicated to an alternative approach. When your plan calls for creativity you will have an option.
The debate will continue and there’s no doubt most of you have seen something other than a single premium immediate annuity and want to know how it compares. I will continue trying to put the pieces together but solutions are all individual so you’ll have to be patient with me. If you need to know the answer for your situation then you need to send me some of the details. Perhaps it will become the topic of an upcoming newsletter.
Enjoy the rest of your holiday weekend!