Annuities and Retirement

It’s entirely possible Congress will do it’s thing and pass new legislation now known as the SECURE Act. The name comes from Setting Every Community Up for Retirement Enhancement. I wrote about it earlier in July.

A key provision of this pending legislation is that it will allow more businesses to offer 401(k) plans that include increased options for annuities. That alone is a clue we’re talking about money slated for retirement.

Using an annuity for any kind of money is not without it’s critics. Some think they are the greatest idea since sliced bread and others see a dark side that should be avoided at all costs. Both miss the point.

Like so many other ideas in the world of money, the truth lies somewhere in between.

Annuities come in two flavors, which we call immediate annuities and deferred annuities. In the context of the SECURE Act, we’re talking about deferred annuities. Simply stated, money goes in and comes back out after a delay which might be a year or many years.

A deferred annuity is a long-term contract between you and an insurance company. The presence of an insurance company is because when the money comes out, you as the other party to the contract, have a life expectancy. Insurance companies have life expectancy calculations down pat. At that point, how long do you plan to stay alive?

In the meantime, you want your money in a safe place, hopefully growing in value, such that when you decide to retire, you can turn your money into some form of income so you can continue to pay your bills. If you’re no longer working, money has to come from somewhere or you run the risk of sleeping on the sidewalk.

I earlier referenced a dark side. Much of that comes from annuities being sold as a panacea for virtually every bad thing that might happen along the way. What was not explained was they were great profit centers for the insurance company and it’s agents. The net effect was that you bought into the bells and whistles and everyone one else feasted on the gravy. If you ultimately came out ahead, that was an incidental benefit.

Please understand the insurance companies are still out there, competing in the marketplace. Some of them have changed their spots and now compete effectively by creating long-term risk management protocols and features that turn out to be really good for consumers. Not all of them, but they do exist.

As a financial planner for many years, I recognize that financial decisions about our money are essentially emotional decisions. Even I have a hard time being objective when it comes to managing my money.

The raw appeal of annuities is a response to the idea called ‘loss aversion’. Insurance companies that offer these contracts make guarantees we really like. They do this knowing we’ll do more to avoid a loss than we’re willing to do to realize a gain. In the past, that’s how annuities were sold, and it worked. It still works.

Today my efforts are directed toward teaching others how to prepare for what will probably turn out to be a 25 – 30 journey into an unknown future with unexpected financial challenges. We call it retirement.

My message is simple. You must find ways to grow your money over time. To do that you must have your money exposed to market risk. Inflation may be tame now but chances are it won’t always be that way. Using an annuity is part of the solution, especially since there are annuity contracts offered that I think do this very well.

At the same time you need to find ways to minimize your ‘loss aversion’. Putting your money under the mattress or in a 401(k) money market account may keep it relatively safe, but offers little opportunity for growth over time. Growth is necessary to offset the inevitable increase in the price of things you need to stay alive.

In the marketplace today, there are annuity contracts that very effectively create opportunities to grow your money and at the same time offer guarantees that you will experience no loss. Their fees are reasonable and over time, should provide you strong upside growth.

When it comes time for you to turn it into an income to pay your bills and have fun, you’ll find new options to choose from.

There’s a chance the SECURE Act will offer millions of Americans a new incentive to set aside current income for use in the future. But it’s still a buyer beware world if you are given an opportunity to participate.

Tony Kendzior \ August 1, 2019