Do You Hate Annuities? Here’s Why You Might Want to Change Your Mind
October 18, 2016 by Stan Haithcock
Even the savviest stock market trader needs a guaranteed income stream to cover basic expenses and future retirement goals. So it might be time to hold your nose and objectively consider how some types of annuities can provide a contractual income floor.
Many consumers and a large number of investment advisers are totally uninformed, or even unaware, of the different annuities available and conveniently spew the “hate all of them” mantra that is the most politically correct statement in the financial world. That’s like saying you hate all restaurants.
Annuities do have their place in a portfolio and primarily are used to contractually fill income gaps and provide a pension-like lifetime income stream.
Flying Solo Works, but Autopilot Is Nice to Have
It’s common sense that not everyone needs an annuity or the income guarantees that some types can contractually provide. If you are able to properly manage your portfolio, or are lucky enough to have found someone truly honest who handles that task, then forgo locking your money up in an annuity contract.
There are the one-percenters who don’t need an income floor or people who are comfortable with income-producing non-annuity investments that come with inherent risk. In these types of cases, an annuity is not needed.
For the rest of us, the two questions we need to ask ourselves are, “How much risk am I willing to shoulder?” and “How much risk am I willing to transfer?” Annuities that contractually guarantee lifetime income are risk transfer strategies. You are transferring the risk to the annuity carrier to pay you an income stream regardless of how long you live. In essence, you are putting your guaranteed lifetime income payment on autopilot.
There is no good answer to these two questions, and the income flooring solution depends on each individual’s risk tolerance and overall investment goals. Age or gender has nothing to do with it.
Your Spouse Could Care Less About Your ‘Alpha’
In most families, one spouse typically handles the money and the other spouse could care less and trusts their partner with those financial decisions.
This common reality should be accounted for when designing your income flooring plan because if the “market guru” spouse dies first, the surviving partner needs to have specific instructions or a plan in place on how to create a lifetime income stream.
Annuitize When You Need It
For the pure trader or market-driven investor, the best course of action to build an income floor is to “annuitize” at the time you need payments to begin. To “annuitize” means to create payments, and the most efficient strategy is to set up an annuity that will provide the exact amount of additional income you’ll need. In other words, if you need an extra $4,500 per month for the rest of your and your spouse’s lives, then you reverse engineer the annuity to know the exact premium for transferring that lifetime income risk.
However, it might make sense to put a written income flooring plan in place in case of an unexpected death of the financial decision-making spouse.
Peel Off Growth to Transfer Risk
One of my clients is an unbelievably successful futures trader whose spouse has no clue about finances. For the past eight years, this trader annually takes a significant part of his trading profits and buys contractual joint life income starting at future dates.
He is laddering the future start dates for his eventual retirement. His primary goal is to guarantee that an income stream will be in place that neither he nor his spouse could outlive. Sacrificing trading profits in order to create income that is guaranteed for life is a plan that works for a top futures trader, and it might be something to consider as an incremental approach to building an income floor.
The Flooring Reality
For most people, the last half of your life revolves around guaranteed income for your or your family. Everyone has an income floor or an amount that is needed every month to cover expenses. Whether it’s a pension (if you’re so fortunate), Social Security, or an annuity type that provides income, contractually guaranteed lifetime payments are needed by a majority of Americans.
So it’s important to remember that an annuity is the only products on the planet that will guarantee income for life. That’s the unique benefit proposition that separates the annuity category from all other financial products, and why even the most passionate “annuity hater” should seriously consider these transfer-of-risk strategies in building their personal income floor.
This article is commentary by an independent contributor. Stan The Annuity Man is the top independent annuity agent in the country, licensed in all 50 states, and a co-founder of Annuities.direct, the first direct to consumer annuity shopping platform.
