Do Retirees With Annuities Have More Fun?

A new report says that retirees who convert their savings into guaranteed lifetime annuities effectively double the amount they are willing to spend each year on themselves and their families.

This indicates that retirees holding more of their wealth in guaranteed income are more willing to spend on luxury items and experiences because of a higher comfort level with additional spending.

The report looked at retired households with more than $100,000 in savings and spending more than $25,000 each year. They were making an apples-to-apples comparison between people that had a guaranteed lifetime income and those with enough assets that they could.

They were looking at the most simple form of an annuity, the Single Premium Immediate Annuity.

When people get into retirement they tend to get into a protective mode where they spend defensively. Without a baseline of guaranteed income, you’re basically in fear mode throughout retirement.

If these guaranteed lifetime income annuities are so great, why do so many Americans not take advantage of them?

The first major hang-up for most people is the lack of liquidity. When you purchase a Single Premium Immediate Annuity those funds are gone from your balance sheet and that gives some people a lot of heartburn.

Another concern is inflation. The payment may be sufficient for your basic lifestyle needs now but that may not be the case in the future. Solutions to this problem include purchasing an annuity that scales with inflation, or to buy more guaranteed income than you need, the trouble with both of those is that they end up compounding the liquidity issue.

The third issue is the idea that a person’s heirs may be disinherited if they die prematurely. The Mac truck factor may play out for you and that’s a real worry for many Americans.

The annuity industry is listening and has created another type of annuity called the fixed index annuity, which goes a long way to solve those problems.

It solves the liquidity problem by not requiring you to take your income right away. During the deferral period you have 10% liquidity, which is often more than enough.

Once you elect to take your income, the income is linked to the growth of a particular stock market index. In the case where the index declines you are protected from the loss.

The last issue fixes the inheritance, where if you die prematurely your heirs will receive whatever your initial investment was plus the growth minus any distributions. 

One thing missing from the article is that if you do decide to do an annuity, it’s important to have the ability to do a piecemeal internal Roth conversion. A fixed index annuity in your tax-deferred bucket can result in Social Security taxation, which can force you to spend down your other assets five to seven years faster.

The piecemeal internal Roth conversion also helps mitigate tax rate risk. In a rising tax rate environment like we are in now, this is a very important feature. Once the money is within the tax-free bucket, it is no longer exposed to tax rate risk.

If you combine all the advantages of a fixed index annuity and a piecemeal Roth conversion feature, you too can have a happy and fun retirement.

Mentioned in this Episode:

Opinion: Retirees with annuities have more fun – marketwatch.com/story/retirees-with-annuities-have-more-fun-11628192718