Since entering the financial services field in the mid-1980s, I’ve shied away from annuities for a whole host of reasons: High fees, inflexible, illiquid, returns don’t keep up with inflation, and that they are only for older people. While I’m not an expert, I certainly knew enough to stay away from annuities.
Or so I thought.
During the COVID pandemic, I had time to dig deeper into financial pursuits, passing my Series 65 and 7 exams, and then exploring annuities. The lightbulb went off—I discovered that while some annuities are cumbersome, others offer no or low fees, flexibility, and benefits for all ages. My perception has changed, and today I’ve purchased annuities for my family, securing income for our retirement and future generations. I truly feel a weight has been lifted off my shoulders and want to share my experience to challenge the negative perceptions surrounding annuities.
The Front 9 vs. The Back 9
When discussing annuities with my colleague Eric Diaz, who is an annuity expert, I very much appreciated his usage of a golf analogy, comparing the "Front 9" to the "Back 9:”:
The "Front 9" prioritizes growth, compounding assets on a tax-favored basis and enabling individuals to accumulate wealth.
The "Back 9" shifts to income, providing a guaranteed income for the remainder of individuals’ lives.
Effectively, the “Back 9:”
Focuses on security, ensuring that individuals won’t outlive their money and income will keep flowing regardless of market conditions
Supports wealth accumulation and long-term financial security in retirement
My goal was to structure an annuity portfolio focusing on income during the “Back 9.”
Differentiating Amongst the Array of Annuities
At the onset of my research – which analyzed thousands of returns across various insurance carriers - I quickly realized the annuity market is quite extensive and ever evolving, with a wide array of annuities designed to address different financial goals.
Thankfully, Eric provided quite a bit of guidance in my annuity research project.
My objective was two-fold: 1) delineate the types of annuities offered by insurance companies and 2) purchase the most competitive, performance-driven annuities for myself and my family:
Fixed Annuities
My first step was exploring fixed annuities, which are fairly straight-forward: Pay a lump sum upfront and receive a guaranteed payout over time. After winnowing down top-rated insurance carriers’ offerings, I purchased multiple fixed annuities for my wife and myself. Mission accomplished: Ensuring that we have a steady source of income covering our ongoing fixed costs.
I found especially appealing the opportunity to obtain significantly enhanced yields – perhaps two to three times the return offered by current bonds – by waiting a couple of years before turning on the annuity’s income stream.
Indexed Annuities
My second step was exploring indexed annuities, which come in all shapes and sizes, offering the dual benefit of eliminating downside investment risk while generating returns keeping up with inflation.
As Eric and I quickly discovered, a handful of indexed annuities – especially those which have multipliers, bonuses and participation rates - have the ability to work exceedingly well on behalf of younger individuals. The potential for growth over time, combined with the safety of a guaranteed minimum, makes these indexed annuities highly attractive.
Variable Annuities
My last step was exploring variable annuities, which allow for increased growth, often with a “buffer” protecting against downside risk. Indeed, some variable annuities offer in excess of 100 funds from which to choose. Quite an array of choices, to say the least!
While I recognize that variable annuities have a number of attractive features – and are quite alluring for individuals with lengthy time horizons - I decided not to take a bite out of this proverbial apple for the time being. That being said, I’m currently evaluating an array of variable annuities to add to my portfolio!
Generational Planning
In addition to purchasing annuities for my wife and myself, I purchased indexed annuities on behalf of my sons. I was initially skeptical of purchasing annuities on behalf of younger individuals, as I thought annuities were only for people nearing retirement.
Rather than dismissing this concept out of hand, I decided to take a deeper dive into exploring whether annuities might be a viable planning tool on behalf of younger individuals. My research indicated that annuities – especially those with enhanced income options - have the opportunity to provide young individuals with a considerable income stream for years to come…which is especially important given that newborns today might have life expectancies approaching 100 years!
As far-fetched as this strategy might sound, my research indicates that a modest contribution has the ability to potentially deliver outsized long-term income on behalf of my sons! If I had known 20 or 30 years ago what I know now, I would have started annuities much earlier!
Bolstering Retirement Income
One of my biggest concerns about the future is the ability to maintain my current lifestyle without the risk of running out of money. Having been in the financial services field for over 40 years, I’ve heard countless stories of individuals outliving their savings.
I want to ensure that my family has the ability to live as much of a stress-free life as possible in the event we are as fortunate as our relatives who lived well into their 90s. By layering annuities into our portfolio, we have taken concrete steps to ensure that we don’t run out of money. Hopefully, we might follow the rather large footsteps of basketball legend Shaquille O’Neal, who began purchasing annuities for himself at the age of 18, shortly after signing his first NBA contract:
“The best word I learned is annuity…When I started in the NBA, every year I invested in annuities. Annuities now provide more income than myself and my family need.” - Shaquille O'Neal
Before purchasing the annuities, I had two basic questions:
What happens if I pass away before turning on the annuity’s income stream? What happens to the money used to fund the annuities? I was reassured to learn that my beneficiaries have an array of options from which to choose:
Receiving the remaining principal plus interest:
In a lump sum
In an enhanced payout over multiple years
Transferring the annuity to my wife, enabling her to receive annuity payments during her lifetime.
What are the annuities’ fees? To what extent would fees drag down the performance of the annuities? Thankfully, the annuities I purchased had little or no fees impacting their policy performance!
Weighing the Trade-offs
While my analysis indicated that utilizing annuities offers significant upside, I recognize there are inherent offs, particularly when it comes to liquidity. My takeaway:
Patience is key.
It’s essential to utilize annuities as a long-term planning strategy.
If individuals are contemplating surrendering annuities during the next 10 years, utilizing annuities might not be advisable.
If individuals are planning on holding annuities beyond 10 years, utilizing annuities very well might be worthy of consideration.
My two cents: Many people might be well-served to carve out part of their retirement portfolio to purchase annuities for either themselves, their children, or even their grandchildren.
Conclusion
As I’ve continued to study and learn more about annuities, I’ve become increasingly convinced of their value. My assessment: Annuities make a great deal of sense for individuals seeking not only financial stability but also long-term growth and an ongoing income stream. Whether individuals are nearing retirement or looking to build and preserve wealth for future generations, annuities can play a valuable role in providing for families, planning for the future, and establishing legacies, making them a valuable tool for long-term prosperity.
Given the wide array of choices available, working with an expert to assess the numerous options is highly recommended. I’d welcome the opportunity to share my research with individuals interested in taking a deeper dive into this topic. If you’re considering annuities, I encourage you to explore how they might fit into your overall financial strategy.