More and more members of the financial establishment are discovering income annuities and their benefits.
Consumer Reports wrote an article late last month about the “The New Rules of Retirement Planning.” In that article, they offered a quiz to have readers find out what they really knew about retirement planning. The quiz – which I recommend to my followers – contains three questions about income annuities. I thought they did a good job of explaining what income annuities are and how they operate.
That is accurate and a good reason to make an income annuity part of your retirement plan.
However, the quiz’s answers also repeated a couple of common misconceptions.
Are they a good deal?
The writer raised the question of whether consumers “come out ahead” when you buy an income annuity, suggesting that you should think of an income annuity the same way you would consider an investment in stocks or another financial instrument. As Consumer Reports points out, a 65-year-old man who invests $100,000 today in a particular form of income annuity in exchange for monthly payments would need to live 17 years to make back the entire $100,000.
I advise people considering income annuities to think of them more like life insurance, except instead of insuring against an early demise, you are insuring against outliving your savings. Just as with life insurance, you might have a larger bank account for awhile if you don’t buy the insurance; however your long-term prospects (and those of your family) are dimmer.
Whether you will make all your money back over a specific time frame is the wrong question to ask. What consumers should think about is whether you will be in better shape or worse off when you include an income annuity in your retirement plan. My answer and those who study the question: Include an income annuity. Not only will you guarantee income for life, you can invest the balance of the savings you have saved for retirement more aggressively. There are also unique tax benefits and, just as with life insurance, peace of mind from reducing the “running out of money” risk.
You are unique
Consumer Reports also implies that income annuities are a one-size-fits-all product when it comes to allocating a portion of your retirement portfolio to them. The plain truth is that there is no single allocation percentage that works for everyone or every couple.
In fact, a great value of income annuities is that they can be customized to individual situations. No two 65-year-old men are alike, for instance. And a single retiree’s income needs are different than for a married couple. In addition to age, gender and marital status, considerations impacting this allocation should include: where your savings are invested, when income starts and your level of risk tolerance, along with many others.
Don’t get trapped by thinking a standard rule of thumb applies to you. Instead, customize an income annuity for your situation, compare prices on those offerings and allocate to the appropriate investment account.
A perfect example of such considerations is a QLAC, a special form of income annuity available only through rollover IRA or 401(k) accounts. There the allocation is limited by regulation to 25%, although you might allocate a smaller percentage.
Where to Learn More
As experts in the field, we subject income annuities to a rigorous analysis based on deconstructing the actuarial pricing, and solving for the internal guaranteed interest rate. We find that rate to be quite attractive on a risk-adjusted basis, particularly considering the credit quality of the annuity issuers in our Go2Income Annuity Shopping Service.
To test your knowledge about income annuities and retirement planning, take the Consumer Reports quiz. Then visit Go2Income.com and create a plan for an income annuity that suits your individual needs.