Annuities for Retirement Income
Let’s just start with a simple question: is a mortgage a good investment for a bank? Between the fact that large banks have their names on some of the biggest buildings in every city and the fact that you can’t go a day without having some lender on LinkedIn trying to loan you money, I suspect that loans are a pretty good business.
Loans are pretty simple business: you give somebody money and they return it to you with interest over some period of time. Banks slowly but surely get a return of their principal plus a return on their investment. Everybody is happy, right?
Apparently not Ken Fisher. Whenever I am browsing the Internet, I always see ads popping up from this guy, Ken Fisher, who apparently hates annuities. That’s kind of a strong statement. I wouldn’t say that I love annuities, but they are a great way for any retiree to get a really good return on their retirement savings and income for life. Yes, I said “for life.” Annuities will continue to pay income for the life of the annuitant. They don’t need to worry about ever running out of money or savings. That’s not a bad thing.
I was curious why Ken Fisher “hated” annuities so much, so I dug a little deeper. He hates annuities because he considers them a “return of principal investment.” Really? Return of principal is a bad thing? As I pointed out above, banks and mortgage companies seem to make a lot of money getting their principal returned along with interest. Why is it bad for a retiree?
An annuity is really just the reverse of a loan. Loans have two main components: an interest rate and a term. If you borrow $100,000 from the bank, you will pay it back at x% over y number of years. The biggest difference with an annuity is that the “term” of the loan is a client’s life expectancy. And it just so happens that life insurance companies are really good at estimating life expectancy. They are the perfect business to offer guaranteed income for life.
If you “loan” the insurance company money, they will, just like a bank loan, return your principal and a really good interest rate, usually in the 4 to 5% range, over the rest of your life. That’s a heck of a lot better than you can get from any bank CD. But is it a good rate?
Many financial advisors use what is called the “4% Rule” to help retirees determine how much income they can take from their retirement accounts without fear of running out of money during their lifetime. Why 4 percent? Because 4 percent allows your savings to continue to grow and keep up with inflation even while taking income and riding the ups and downs of the market. To put this in real simple English, you are annuitizing your savings. You are using a simple rule of thumb to return your savings (aka “principal”) over your remaining lifetime.
So with the 4% Rule, you are “returning” your principal from your retirement savings account while letting the remainder grow and earn interest. The only difference between the 4% Rule and a true annuity is that the insurance company is guaranteeing that the client will have lifetime income and never run out of savings. Since many annuities pay well more than 4%, it actually seems like a better deal to me. I don’t have to worry about the market and I have income for life. Am I missing something?
Watch my video showing why an annuity is better than annuitizing your retirement savings: https://youtu.be/mnFdtNLPBys
Bottom Line: An annuity is a low cost investment that will yield a very competitive rate of return that you can’t outlive. They can be designed to pay out over multiple lives so that both you and your spouse need not worry about running out of income. They can even be designed to pay the remaining balance to another beneficiary upon the death of the original annuitant. It’s a very flexible and customizable product.
A retiree shouldn’t have to stress out wondering if the next market crash is going to wipe out their savings or if they will outlive their savings. Trust your retirement planning to a true professional, not an internet marketing guru.