The Myth of Annuities and Liquidity

The thought of not having access to retirement assets is one of the biggest issues people have with annuities. I think it’s funny when investment advisors, who have no intention of ever giving up management of a person’s assets, claim that if you buy an annuity you will lose control of your money forever. As much as annuity salespeople can be misleading, other professionals in the industry who want to sell you something else can be every bit misguided in their claims.

The truth is that annuities have more liquidity than any other safe investment, except for cash in the bank. And it’s the ability to access money that gives the right annuity a strategic advantage when managing a retirement portfolio.

When mentioning the 10% free withdrawal people often mention they may need more and don’t want to give up control. Many of these people have been saving and investing for 30 years or more and have never touched their money so 10% is more than they’ve ever pulled before. That’s not always accurate considering some people kick off retirement with a major purchase and need full liquidity. But for anyone talking about general retirement planning, if you need more than 10% of your portfolio consistently then you haven’t saved enough.

So taking up to 10% annually from your safe assets should be more than adequate if a portfolio is structured correctly. Almost everyone underestimates the value and flexibility that can add to a retirement strategy. In addition, to access, providing the opportunity to draw income for anyone who doesn’t opt for the lifetime income stream, free withdrawals can be used to rebalance a portfolio or ladder funds out to other investments as opportunities arise.

Protecting enough to sustain consistent retirement spending is important. Continued growth of assets is also important to protect against inflation and provide for unexpected emergencies in the coming years. Low-interest rates and uncertain financial markets make it difficult to find the right balance between safety and growth.

That’s the exact justification for the strategies I propose. Several years ago I started comparing income-producing annuities. Most were paying between 4% and 6% of premium as income. Since that is well under the free withdrawal amount in most annuities I started looking at short-term deferred contracts that offer the same level of safety only without the lifetime income guarantee. I realized that you can always take the deferred product and use the funds to buy an income product later. Why not take the short-term deal now and wait for a longer commitment when rates are higher in the future?

This is a simple explanation of how you can use the free withdrawal to your advantage. The idea is to keep your powder dry, so to speak. In the absence of the absolute best option, take the best option available but be able to make changes as conditions improve to give you more advantage. Using this as the basis for my annuity recommendations has led to the discovery of more sophisticated strategies that make the traditional approach obsolete.

I’m not here to tell you what to do with your money, rather to share ideas so you can make confident decisions for yourself. Don’t underestimate the advantage provided by a 10% free withdrawal. Most contracts I recommend span from five to eight years in total term. By maximizing free withdrawals you can get a substantial portion of your money into other investments before that point in time when you can move it all. As I say all the time, if the annuity is the worst thing in your portfolio then your other investments are in great shape and you can move your annuity money in that direction with the available withdrawal. But if the markets hit the crapper you’ll be darn glad to have an asset that doesn’t lose value. Maybe then you can even use the withdrawal to buy into the market when there’s good value. Ooh… there’s a new idea!

Regardless of what you do, don’t let ignorant comments limit your scope of understanding. It may lead you to make decisions you regret. I’ve seen it go both ways. There are not only people who spend far too much on the wrong annuity but also people who have far too much risk to survive volatile times.

An annuity would never work for a professional gambler or someone who flips houses. But for solving general concerns related to retirement planning, the right annuity inside your portfolio really is one of the best options available. If liquidity was a concern before this will hopefully convince you that it’s all relative and if you have saved enough for retirement, the 10% annual withdrawal is well more than you need.

If you end up using an annuity in retirement, I want to make sure you do it the right way.


Further readings

Fixed Indexed Annuity Guide

Fixed Indexed Annuity Withdrawals

How Much Do Fixed Annuities Pay?

Last Updated on March 5, 2024 by Bryan Anderson