There's More to Financial Planning Than Financial Planning by Brian Zeek

Author:Brian Zeek [Brian Zeek and Dee Dee Brooks]
Language: eng
Format: epub
Publisher: Morgan James Publishing
Published: 2018-02-14T23:00:00+00:00

THE ANNUITY: IS IT A TANK, OR A PADLOCK?

“I’m not too hot on annuities,” a client told us recently.

“Oh?” we said. “What do you know about them?”

“Not much.”

Retirement in this country used to be a three-legged stool that consisted of Social Security, pension, and savings. In the twenty-first century, however, the pension has mostly disappeared. And annuities—though they have their advantages and drawbacks, like any financial tool—are a means by which you can create your own pension.

People often go into retirement thinking that they’ve just got to have a big pot of money—often a big IRA account. But consider for a second that you’ve probably lived your entire life not by drawing money from a big account but rather on the twice-monthly installments of a paycheck. Retirement doesn’t have to be any different; an annuity is a means of creating that paycheck for your retirement.

When we explained these details to that client who said she didn’t like annuities, she changed her tune—and decided she wanted an annuity in her portfolio.

There are a million different types of annuities out there, and some are better than others. It’s not a tool that we recommend for everyone, nor is it the first tool that we recommend for anyone (for one thing, annuities aren’t tax-advantaged the way cash-value life insurance is). But an annuity can be an important part of a well-structured financial plan.

For instance, we work with some married couples where one spouse has a pension but the other doesn’t. That means the income will disappear when the pensioned spouse dies—potentially leaving his or her better half in a vulnerable position. In that case, an annuity can be a smart way to go. We build a pension that will pay out through both spouses’ lifetimes.

Or consider a friend of ours who retired twelve years ago with a monthly pension of $5,000. That seemed pretty darn good on the day he retired. Now, after twelve years of price increases in everything from health care to a carton of milk, $5,000 a month isn’t as good. So we were able to set him up with a step-up annuity, to keep pace with inflation. That’s a great tool that wasn’t available even a few years ago.

Another common situation is one in which half of a couple—often the husband—isn’t in great health. That means he is likely to predecease his wife, who may well live into her nineties. Often, they’re living on IRA money—but once that’s gone, it’s gone. An annuity is a payout for life, guaranteed. That’s powerful.

Let’s provide an example: As mentioned above, most of us have lived on steady, regular paychecks our entire working lives. The idea of having a steady “rock” in the form of an income annuity that has a lock-and-reset feature is comforting. With that rock, you don’t necessarily have to weigh down your stock portfolio with underperforming assets. You can afford to take those accessory dollars, not your nest egg dollars, and be a little more adventurous. You can have fun with the market, without the pressure of worrying about gambling away your nest egg.

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