Should I Add Annuities To My Retirement Plan Or Not?

Demystifying the annuity conundrum (are they all good or are they all bad?

It seems there is a divided financial services industry which fully embraces annuities as an intelligent complement to social security and other nonliquid assets and the other side of the industry that “bashes” annuities as investments too risky, too complex and commission driven so ipso facto stay away from them all.

Based on my 30 plus years in this industry acting in several capacities(as a General Counsel of a prominent life carrier, as a Chief Compliance Officer supervising hundreds of financial advisers, or as an independent financial advisor) I respectfully submit that both industry camps would serve the public better in not taking sides, i.e. with bad apples in both camps, a trusted adviser should and can serve his/her client’s best interest using both models where suitable. Yes, there are some annuities that have hidden charges, are overly risky and should be shied away from. Similarly, there are advisors who manage clients assets and profess to be “better” yet despite their window dressing are in the bottom line receiving far more compensation than they would by suggesting a risk free annuity with lifetime guarantees without extra rider charges.

To walk the talk, my wife and I have assets, some being managed by large institutional entities, and about a half a dozen lifetime annuities which pay us monthly and provide peace of mind that we don’t worry about the unpredictable stock market being severely affected by the incessant political infighting in Washington and unstable global economy. Presented with full disclosure of the advantages and disadvantages, a trusted advisor can and should educate a client approaching retirement with this landscape and suggest options so the client can make an informed decision about what is most suitable for him/her in terms of risk tolerance (baby boomers are likely more conservative at this time of life).

Anti-annuity bashers frequently misunderstand the myriad of annuity options and find it far simpler to say stay away because commission is paid upon sale. For example, a life only annuity with no period certain for the carrier to pay would be an extremely rare if ever good recommendation since one would make a single lump payment and take the risk that if they passed immediately after accepting the annuity, they would lose the entire investment after a single payment. If the policyholder has beneficiaries (the majority of clients do) this type of recommendation would be not only not in the client’s best interest but also “malpractice.” Query why commission is such a negative yet the majority of the retail industry is based on commission. Would one say all service providers, even waiters/waitresses, could be accused of steering their customers to the highest priced entrees since that will end up with a bigger bill thus higher tip? I’m sure we would agree some do but that doesn’t mean we can not discern what is in our “best interest” and what we would enjoy the most.

According to the Life Insurance Marketing and Research Association (LIMRA), annuity sales in 2022 totaled $310.6 billion, a 22 percent increase from the 2021 sales of $254.9 billion. Taking a layman’s noneconomic inference, 2008 had set the record in annuity sales (which has been far surpassed last year) in part attributed to the severe downtown with the stock market correction due to the dot com companies facing retrenchment. Now, when we are in an era of the baby boomers approaching and entering into retirement, desperate to find safety and security, this has led to massive annuity purchases notwithstanding money managers spending millions on TV advertisements saying to being wary. Todd Giesing, assistant vice president, LIMRA Annuity Research, recently stated the “Fluctuating interest rates in the fourth quarter prompted investors to lock in crediting and payout rates while they were high. Our forecast suggests that protection products will continue to boost growth in the annuity market for the next several years.” Fixed annuities provide downside protection against an unpredictable market whereas sales of variable annuities have suffered for precisely the same reasons when certain policies cannot offer this floor.

I don’t want to tip the scales for either camp since my defense of some annuities could lead certain pure money managers only accusing me of the famous line in Shakespeare’s Hamlet: “The lady doth protest too much, methinks.” (Kind of my pet peeve of not trusting anyone who says to me, “I’m telling you the truth.”) Isn’t that what you should have been already doing without saying you are?

Annuities will have varying degrees of decreasing surrender charges. For those unaware, This means that your money that you set aside into an annuity is held by the carrier who invests the funds and makes their own hedging bets counting on the funds being relied upon for the carrier to make a better spread than what they are offering to the public. The client is not incurring any charges if he/she lets the money grow during this period and allows the surrender charges to go down to zero. A downside is that this money is in a sense not liquid during this period although some carriers allow you to make a 10 percent annual free withdrawal. For qualified funds, if at an age when you have to take annual Required Minimum Distributions(RMDs), these withdrawals are also not subject to any current surrender charges. If you will never be comfortable in not having instant access at any time to all your funds, then annuities are not for you.

So how do you move forward with adding annuities to your overall retirement plan? Naturally, only a portion of your assets should be considered for this investment and the carrier itself ensures that no policyholder has unwittingly tied up the majority of their net worth.

In conjunction with adding another bucket(s) of guaranteed lifetime income for you and your spouse, for those clients I have worked with over the years they will always hear me on my soap box that long term care protection needs to be built into one’s overall retirement plan. (See My Long Term Care Story as an Advisor, Broker World 10/2021.) Obtaining this protection is a gift to your children and/or younger family members who love you. Maybe you have to experience or observe the enormous cost and challenging toll on the caretaker’s time, and emotional wear and tear, to really appreciate the urgency of incorporating this into a plan.

Assuming one’s children volunteer—that there is no worry that they will, of course, take care of you—this loving commitment is unfortunately probably unfair to the younger generation. Outside agency caretaker costs are annually increasing exponentially more than inflation. One client relayed that perhaps I misunderstood his culture. Perhaps so but I doubt it. Walking in on a loved one naked on a bedroom floor having soiled himself might change my friend’s perspective.

Getting one’s affairs in order requires an attorney who can draft a will, set up Powers of Attorney both over you and your property, health directives or trusts as the case may be. Even with my law degree, and multiple security licenses I have held, I usually but not always add annuities with no extra riders attached, include a long term care policy, and life insurance that serves as instant cash to help some estates pay estate taxes without having to sell at less than fair market value other existing appreciated assets. Or, for smaller estates, the life policy’s cash to loved ones is never a bad decision.

This planning is not rocket science. Knowing your advisor, feeling comfortable he/she is experienced, will result in you having peace of mind. Not worrying about the future of your loved ones equates to starting now. Why? I refer you to a book called Still Alice by Lisa Genova about a cognitive psychology professor at Harvard, 50 years of age, who recognizes that she has early stages of dementia and tries unsuccessfully to set her affairs in order before the impairment becomes too severe.

Ross Friend, JD, CLU, ChFC, FLMI, consults with advisors nationwide specializing in premium financing for professional and business owners.

Friend received a BA summa cum laude from Boston College and a JD from Emory University, where he was the editor of Emory Law Review. He has the distinction of being a FINRA arbitrator and is a frequent speaker at industry conferences and company meetings.