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Are Annuities the Donald Trump of Retirement Income Planning?

For The Wall Street Journal article, “Why Investors Should Consider Annuities,” Morningstar’s David Blanchett looked into whether or not annuities are good for personal retirement planning. He likened annuity products to Donald Trump because people tend to love them or hate them, much like the current Presidential candidate. The majority of financial planning researchers agree that annuity products can be a good option for most retirees because they create a personal pension from your retirement savings. They are also one of the only ways to guarantee lifetime income for yourself when you don’t have a traditional pension plan.

Even though annuities make sense for many Americans, few of them actually annuitize any of their retirement savings. This is not the case in other countries where citizens have a higher opinion of annuity products. A couple reasons that Americans give for not liking annuities are that they lack liquidity and are often missold. Mr. Blanchett believes that annuity products are simply misunderstood by many Americans. Annuities are too often thought of as investments or a way to maximize your wealth. This is typically not the case. Annuities should be classified as risk management tools, just like any other form of insurance. You won’t likely be better off financially from buying an annuity, but you will protect yourself from the risk of outliving your money during retirement. You should use an annuity to protect your retirement savings in the same way you would use car insurance to protect your car and life insurance to protect your loved ones financially if you die young.

Here are three reasons why you might want to purchase an annuity. Annuities offer guarantees, so people who seek certainty are often drawn to these types of products. If you don’t have a lot of guaranteed lifetime income coming in from sources like Social Security and a company pension, you could be a good candidate for an annuity product. You want to make sure that you have a significant amount of retirement income that is guaranteed. It’s also important to consider your health and even your family’s historical longevity when looking at an annuity. If your family members have lived to old ages and your health is good, an annuity might be right for your planning. The longer you live, the more money you get from your annuity.

The article points out that the best way to annuitize your money is by delaying Social Security. You cannot buy a private annuity that pays better than when you delay Social Security. That delay also increases your spousal benefits and has tax benefits as well. This strategy, however, is not always possible and even when it is, not everyone gets enough income from Social Security to meet their basic needs. This is where a personal annuity product comes into play.

Mr. Blanchett recommends three different types of annuity products that you can use with three “buckets” of money. The first is a single premium immediate annuity that pays a fixed level of income starting right after purchase. The second is a deferred income annuity. This type delays payments for at least ten years, but still pays a fixed income level. The third type of annuity product recommended is one where the income level varies based on the performance of a portfolio. One example for this bucket would be a variable annuity with a guaranteed lifetime withdrawal benefit. There are obviously other types of annuities to choose from as well. Each annuity type should be carefully considered based on your personal needs and goals, such as whether or not you want death benefits for your heirs. Each household will see different benefits and drawbacks from different annuities. It’s wise to at least consider annuities when planning for retirement because you cannot guarantee lifetime income from your portfolio any other way. Do your research and consider each annuity product just like you will when you are looking at the Presidential candidates.

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