How Protected Income May Greatly Enhance Your Retirement

We want to discuss something that in our experience has been greatly misunderstood over the years. That “thing” is called a lifetime income annuity, and our goal in the next couple of minutes is to try to clear up the confusion with some recent research. Here’s how a lifetime income annuity, and the protected income it provides, has the potential to enhance your retirement.

Annuities in general have either been touted as the greatest financial instrument of all time, or as the worst possible investment anyone can make. Hence the confusion. But the truth is that NEITHER of those statements are true.  

An annuity is nothing more than a financial tool, which, when used properly, can be wonderful for individuals who are working to pursue certain goals. Is a hammer a good tool? If your goal is to pound a nail into something, then yes – it’s ideal. If your goal is to paint the living room, then no – a hammer is a waste of money.  

That same concept applies to any financial tool as well, including lifetime income annuities. 

The reality is that these products have changed a lot over the years and are in fact much more popular today than ever before. 2022 was a record year for lifetime income annuities, and I suspect 2023 will be much the same. 

Why are they so popular? The obvious answer is that during market downturns, like we saw in 2022, investors are looking for comfort from the guarantees that annuities provide. But that’s not a strategy – that’s just reacting to current market conditions. 

Speaking strictly from a strategy perspective, the decision to purchase a lifetime income annuity is not so much about managing your emotions: it’s more about simple mathematics. 

Here’s where the research comes in. 

This was commissioned by Principal Financial Group and conducted by Michael Finke, Ph.D., CFP®, and Wade Pfau, Ph.D., CFP®, two researchers from The American College who have spent years studying this and are both very well respected by the advisor community.  

They ran Monte Carlo simulations for portfolios using both annuities and investments and compared them with traditional investments-only portfolios.  

The research found: 

• Income annuities allow a retiree to spend at a level that investments alone would be unable to match without significant risk of running out of money before age 95. 
• Adding an income annuity to a retirement portfolio allows a retiree to get the same or higher income with lower risk of outliving savings than an investments-only approach.
• Using both annuities and investments can enhance the value of assets for heirs over the long term.

Think about that for a moment. Isn’t increasing available retirement cash flow, reducing risk and creating a greater legacy what the retirement game plan is all about? 

And while traditionally we like to talk about using lifetime income annuities as a way to protect against both longevity risk and sequence of returns risk, the reality is that adding some form of protected income annuity to your portfolio may create opportunities to “play offense” with the rest of your portfolio by allowing you to potentially allocate more to equities than you otherwise would by using a traditional investments-only portfolio.  

One last thing here: Interest rates have a lot to do with the benefits and features that annuity carriers offer to their policy holders. Since we have seen a tremendous increase in rates over the past 18 months, insurance carriers are getting more creative with their products.  

If you already have a lifetime income annuity, there’s a good chance that there’s a newer one now available with better features and a more favorable rate.  Kind of like when you refinance your home when interest rates go down – right now may be a good time to “refinance” your lifetime income strategy. 

Our advisors and their staff regularly look at annuities you may already own to check if there may be an opportunity to improve outcomes by switching to a newer one. This is NOT always the case; sometimes there’s opportunity and other times not. Just know that we’re looking.  

If your strategy doesn’t have a Protected Income bucket, then now is the time to explore your options and upgrade your bucket strategy. Our team studies this stuff continuously and can help guide you to find out if an annuity is suitable for your situation, and if it works with your Bucket Strategy. 

How can we help you the most? Just give us a call.