Does it Ever Make Sense to Purchase an Annuity?

Have you ever wondered if purchasing an annuity makes sense for you?

There are two conflicting opinions from financial advisors: some advocate for annuities while others advise against them. James explores the concept of being a fiduciary and the challenges of understanding the financial advisory industry. He covers when annuities may be a suitable option, such as providing guarantees, protecting against longevity, guaranteeing core expenses, and the benefits of Qualified Longevity Annuity Contracts (QLACs) in reducing required minimum distributions.

There is no one-size-fits-all approach to financial planning. Your individual circumstances and goals will determine whether annuities are the right choice. It's always a good idea to seek professional advice and review all your options when making decisions about annuities.

Questions answered:
Is an annuity a suitable financial product for retirement planning?
What factors should you consider when deciding whether to purchase an annuity?
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⏱Timestamps:⏱
0:00 Intro
2:51 What is a fiduciary?
8:43 Explaining annuities
10:53 The wrong way to look at it
13:23 Another way to look at it
17:53 When is there a case for an annuity?
19:49 Another case
22:06 Qualified Longevity Annuity Contract
24:40 Outro

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Worried about retirement?

[jamesgraham]

Just turned 69 and I put half of my money into a 5yr fixed annuity for my income bucket that will create 5.30 pct interest while giving me principle protection I feel much more relaxed letting my growth stocks grow for the next 10yrs

[khoasterful]

I’ve recently retired at 55 and detailed retirement planning, including annuities. My feedback.
1) buying annuities is like buying insurance, a guaranteed form of payment. James already detailed the upside and downsides (thx James!).
2) Am I putting a good chunk of change into a single entity over a long period of time? What happens if the company goes bankrupt? I can also do that with index funds, with less risk.
3) insurance companies that sell annuities don’t do so unless it is profitable. [non-fiduciary ] brokers don’t offer them unless it is profitable. That’s extra layers of fat…
Food for thought. Happy retirement:)

[kenhansen]

Best deal in town was to buy a treasury bond at 5% when interest rates peaked. Guarantees to double your money in 14.4 years. I put 40% of my portfolio into these investments at 4.5% to 5% rates. Laddered income investments gives the flexibility to invest at better rates whatever the future holds for higher rates when future laddered income investments mature. At age 70 works better than annuities. I will also have the principal whenever I want it with the flexibly of selling treasuries.

[guzzi]

I am out of debt.That is the Key place to be, before retiring.. We can live off of your SS and I have two 5 year fixed indexed annuities that have done pretty well for me. You don't loose any of your principal and I am paying no fees. I also have a 5 CD Ladder that mature at different times. I can use that money or buy another one when one matures. About every 2 years I have a CD maturing. What I have now have great interest rates too!

[curtismclay]

I can't tell you how much I appreciated this video. Your explanation of a fiduciaries and annuities was so clear and concise! I have been looking for years for clear answer to these questions, and I found it for free on youtube. Thank you!

[TSinRM]

I don't see buying an annuity as an all or nothing proposition. As part of my retirement planning, I put a portion of my nest egg into an immediate annuity to cover what you term as core expenses. My annuity has a guaranteed period, whereby should I die before my principal was received, my serving spouse would receive the balance. My annuity is for my life, so I'm hoping I receive more than the amount I purchased. 

I was okay with the opportunity cost, knowing that my basics would be covered in retirement. I still maintained most of my nest egg in an IRA with a financial advisor so that it will hopefully grow and outpace or at least keep up with inflation. We receive part of our retirement funds from the IRA, as we have witnessed the markets have been pretty volatile recently. If all of our income were dependent on the IRA, I might now start feeling some pressure to decrease my IRA withdrawal rate for feel of exceeding the 4% rule. Everyone's financial needs are different, but the annuity has served a good place in our planing thus far.

[johnwilson]

Remember that deferring Social Security as long as possible is the best deal in purchasing inflation indexed annuities.

[DaystarHiker]

I have Annuity + Social Security as a base income. And a retirement fund to supplement that. The annuity protects against sequence of returns risk. if the market is down, I just won't with draw until it turns up.

[markt]

Thanks for putting this post together. I have kicked around the idea of an annuity but like the idea of a smaller guaranteed annuity to handle some expenses and investing a bigger percentage in vehicles that can grow.

[Steve-kuwk]

James, this was a great podcast. Thank you. As I am on the cusp of retirement myself, I had been struggling with the question of whether to annuitize part of my portfolio. A major investment firm, where I keep my assets, defaults to an annuity recommendation for guaranteed income as part of their standard online retirement planning center. I came to the conclusion that in my personal situation I was not comfortable going the annuity route, primarily due to the lack of inflation protection. I appreciated the thorough discussion that you did on the podcast which helped provide me with further confidence that I had taken into account some key considerations related to annuitizing.

[OnCashFlow]

The Book "Die With Zero" got me interested in learning more about annuities. Previously I always thought it was never a good idea, and that it was always a sleezy financial product. Glad that I am at lease expanding my mind and learning more about them and their complexities.

[KJFC]

Good opportunity to discuss the rule of 72. This can give you a quick insight into how fast inflation will reduce the value of the payment on an immediate annuity

[rogersporre]

James has a gift for making a very complex issue completely understandable. I so appreciate this discussion! Somehow I have never been able to accept the maxim of buy term insurance and invest the rest; which is very simple compared to annuity investment. I was advised to invest 25% of my net worth in indexed annuities to cover all expenses. My parents lived into their mid 90’s so I would like to think this will significantly reduce longevity risk. I am still able to sleep despite market volatility and this is clearly my source of peace of mind.

[etcomehome]

We have an immediate annuity for 7 years and then a deferred annuity with guaranteed lifetime payout out of at least $20, 000 each year. I like guaranteed income that allows me to sleep at night. We also have a long term growth bucket that is entirely equities and we don’t expect to touch. I think it depends on your investment style. But in general I think once we have won the game to retire, it’s better not to play an aggressive game and expose to market risks too much.

[immortalnow]

James, I'm a first time listener and appreciate your clear and simple explanations, much better than most.

[darwinjina]

Had received plenty of suggestions to surrender an annuity. Well, wife liked the guarantees on an annuity, so it was a no go.

[Tjay-urqp]

At retirement, I went into a 5 year Guaranteed Annuity which basically covers my fixed overhead while at the same time allowed me to deferred taking Social Security until 70. In effect, in addition to the “peace of mind” that my expenses were covered, the Annuity also allowed my deferred SS to grow at 8% each year until 70 which will be close to an equal “ swap” then to what the annuity is paying now.

[JT-eqze]

One option that might be worth looking at is if your planning on giving money to a college or university, they will pay you nice return for as long as you are are alive. Maybe this is not an "annuity" by definition, but it seems to work the same way. Any comments from you James would be appreciated.

[MichaelToub]

Thanks for pointing out the lack of inflation adjustment

[richardbryanesq]

I’ll add that as an estate planning and elder law attorney in New York I see lots of elderly people and by and large those who converted assets into annuities decades earlier are typically much more secure financially in the latter years of life than those who didn’t. For what it’s worth.