analyzing annuity payments in retirement

If you get a chance, you might read this article “Why Retirees May be Wary of Annuities”.  Written by two knowledgeable academics and based on a study of consumers, the authors concluded that the aversion to income annuities may be related to a question of fairness, i.e., insurance company holds on to part of the annuity reserve at the death of the annuitant.

At the end of the article, the authors suggest that what’s needed for annuity acceptance is a “highly personalized approach, in which the [planning] solutions are tailored to reflect the goals, circumstances of the individual.” That’s what we’re trying to do with our new Income Allocation Tool.

As regards the fairness issue, here’s how I’d respond to the study participants:All insurance is based on pooling and sharing of risk. Who has paid for fire insurance and not had a fire, or paid for life insurance premiums to cover a mortgage and lived until it was paid off – and didn’t get their premiums back?  The peace of mind and protection from knowing you were covered is only possible if your reserve pays for the claims of other insureds. While income annuities are paid for with an upfront premium, the pooling still exists.

What if you’re not convinced by the risk-sharing argument?  If you still believe it’s unfair then buy some protection for your beneficiary, either through the income annuity itself or through a separate life insurance policy. If you do it through the income annuity, it will lower your income but if it makes you feel better, then go ahead.

You are getting paid for this loss of reserve in higher annuity payments. What you are doing is generating more income without taking investment risk. In effect you are “selling” this part of your legacy to the insurance company who pays you back in higher income. Often these are called longevity or mortality credits.

But enough of these technical arguments about the income annuity as a singular product. The bigger issue in evaluating income annuities is that they are posed as an either/or product purchase decision rather than as a how/how much retirement planning decision. For example, very few investors would buy junk bonds or emerging market equities unless they were part of a diversified investment portfolio.

Similarly, you should look at your entire retirement income plan with and without income annuities and decide which is better, looking at all of the aspects of the plan. From legacy early in retirement to liquidity in mid-retirement to income late-in-retirement.

The problem for the consumer is that most sellers of income annuities don’t present in the context of the personalized {planning} solution the authors suggest. They are often life insurance agents and not investment advisors.

Go2Income puts Income Annuities together with Income Allocation planning so you can see how annuity payments can be a key source of your income.

Visit Income Annuities and Income Allocation on the go2income website.