Why Smart People Buy Annuities Even If They Don’t Need Them
I don’t sell many annuities based on need. I mostly sell people annuities because they want what it can provide. They either want to protect money and an annuity is a great way to do it, or they want to maximize a portfolio over time and have realized that guaranteed income does far more than just provide a steady paycheck. There will always be people who doubt these claims and it’s only because they either sell something else or lack the open mind to let go of preconceived bias.
Since annuities are all about protecting assets, you need a goal before you start looking at options. Half of all people coming to me simply want to preserve an asset and others have a specific income goal they’d like to reach. It’s not uncommon for these two goals to blend together. I’ve seen it several times in the past few weeks so it got me thinking about something I posted last year. Let’s talk about people who come in with a goal to simply protect money but also want some guaranteed income. I say it this way because it comes about when the person wants to protect a greater amount than is necessary to produce the desired level of income.
We have talked about how best to maximize income and it all depends on when you want the income to start. SPIAs are usually but not always best when income starts in the first year and GLWBs on fixed indexed annuities are always best if you want to delay income payments for more than a year. I’ve got two quick case studies on this that will illustrate the idea perfectly. It’s another reason why a really good agent must a have working knowledge of all the tools available.
The first is a lady who wants to protect half of her IRA which is about $350,000. She also needs to secure an additional $20K per year in retirement income starting in about a year. It doesn’t take the whole $350K to do that. She wants to protect half of the money but only part of it is necessary to provide what she needs. It costs about $230K to get the income guaranteed which leaves roughly $120K that she also wants to protect. All of it going into an income product is going to produce too much income and potentially adverse tax consequences so that’s not viable. What is the best path?
Another man came to me about a month ago and said he has $500,000 that he’d like to protect and that he’s interested in using annuities to do it. As a side note he also wants to have an additional $2000 per month income starting in ten years. The whole amount in a guaranteed income product would produce over $80K per year in ten years so it will only take about a quarter of the total to produce the income he wants. He has a whole lot of options at his disposal and is only different from the first lady because he can defer the income for so long. What will he decide to do?
The way I see it, each person has three options with annuities and even the ability to do it without if they’d like. But remember, both had said they wanted to protect a specific amount of money and that’s why we consider what the full amount will do. This is kind of one of the reasons I started talking about the Flex Strategy years ago.
- Take part of the money and buy guaranteed lifetime income – a great idea for both people. Spend the least amount of money possible and open up options with the remaining amount of money. Good annuities to use for the remainder would be a MYGA or FIA and they’d have discretionary access to the account. That will help with spending adjustments or required minimum distributions when the time comes. This provides more control over a large portion of the assets and reduces fees as well.
- Use a no fee income product. This is more applicable to the second example of the man who only needed a quarter of the assets to produce necessary income. These products have higher growth potential and the performance translates to the type of guaranteed income that will be produced in the future. You take some risk with performance dictating future income but you don’t pay fees to do it, meaning you’ll have a much higher remainder value. Since either person has more than enough to create the income desired this will work great and provide plenty of planning adjustments in the future.
- Flex the whole thing. If either person wants the ultimate amount of flexibility with the assets, safety and really high growth potential then it might be a good time to use a product with no income rider. In either case the interest earnings will be more than enough to hit the income goal. I took three videos to explain how this all works and it’s going to get redone and updated very soon.
Prior to about three years ago nearly everyone who bought an annuity from me used the third option because income payouts were very low. Nowadays the annuity income payments are so aggressive that it’s hard to ignore that as an option and it’s something I recommend to almost everyone. Many people like the Flex Strategy and decided to actually fund it with more money because they wanted more protection. It’s still a viable strategy in many cases and especially if you have plenty of retirement money and your desire is to sensibly protect a good portion of it. If you don’t need to, why leave your retirement to chance?
Have a great weekend…
Bryan
Watch Podcast Episode 169: Why Smart People Buy Annuities Even If They Don’t Need Them
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Last Updated on February 14, 2025 by Bryan Anderson
