In this episode, podcast host and author of “Control Your Retirement Destiny”, Dana Anspach, covers Chapter 8 of the 2nd edition of the book titled, “Annuities.” If you want to learn even more than what there is time to cover in the podcast series, you can find the book “Control Your Retirement Destiny” on Amazon. Or, if you are looking for a customized plan for your retirement, visit us at sensiblemoney.com to see how we can help. Chapter 8 – Podcast Script Hi, this is Dana Anspach. I’m the founder and CEO of Sensible Money, a fee-only financial planning firm. I’m also the author of Control Your Retirement Destiny, a book that covers all the decisions you need to make to align your finances for a transition into retirement. This podcast covers the material in Chapter 8, on annuities. Are annuities a bad investment? Or a good one? You’re about to find out. If you like what you hear today, go to Amazon and search for Control Your Retirement Destiny. And, if you are looking for a customized plan, visit sensiblemoney.com to see how we can help. ————— There is a lot of conflicting information on annuities. Are they a good investment? A bad one? Are they even an investment at all? The answer depends on what article you happen to be reading at the time you are asking the question. If we boil it down to the basics, an annuity is a contract with an insurance company. The insurance company provides you a set of guarantees. You place your money with them in return for those guarantees. That makes the purchase of an annuity quite a bit different than investing in a stock, where there is no contract and certainly no guarantees. The key to understanding annuities is understanding what the guarantees are, and how they work. That may sound easy; however, there are many types of annuities, and they are not all alike. Let’s start by breaking annuities down into four main categories. An annuity can either be immediate or deferred. And it can be fixed or variable. As we cover each of these four categories, we’ll also discuss a few sub categories like equity-index annuities, and variable annuities with guaranteed income riders. We’re going to start with an immediate annuity. Picture a jar of cookies that represents your money, or a portion of it. Now, imagine you hand the insurance company this jar full of cookies. Starting immediately, they hand you back a cookie each year. If the jar becomes empty, they promise to keep handing you cookies anyway, for as many years as you need them. In return, you agree that once you hand them the jar, you can’t reach in anymore. If one year you want three cookies, you’ll have to get them from somewhere else. No matter how long you live, and no matter how much of your other money you spend early in retirement, you’ll still get a cookie each year. Annuities were designed for this purpose – to make sure you don’t run out of money and to make sure you have income over a potentially very long life. This is what annuities are really good at. When people start comparing annuities to other types of investments and discussing rates of return, they are missing the point. You buy an annuity to provide guaranteed income for life. A mutual fund does not provide guaranteed income for life – so comparing those two options side by side doesn’t make any sense. If you want a portion of your income guaranteed for life, look at an annuity. That’s what they are made for. With an immediate annuity, the income begins right away, and the payout is fixed. This type of annuity is good at two things: 1) protecting you from outliving your money, and 2) protecting you from overspending risk, as you can’t dip into the cookie jar. What if you don’t need the income immediately, but you still want to know you will have guaranteed income in retirement? That’s where a deferred annuity comes in. With a deferred annuity, you put a lump sum into an annuity contract, and the insurance company guarantees a specific payout that begins at a set time in the future. There are many types of deferred annuities. One version, offered inside of retirement plans, is called a “QLAC” or Q-L-A-C which stands for Qualified Longevity Annuity Contract. With a QLAC the maximum amount you can buy is $125,000 and the income is typically contracted to begin at age 80 or 85. Why would you want a product that isn’t going to pay out until your 80’s? Some people like the idea that they could spend everything else they have between now and age 80 or 85, with the security of knowing a guaranteed income will begin at that age. A more common type of deferred annuity is one that is purchased in your 50’s, with the income designed to begin at age 65 or 70. For example, if you are age 55 today and your investments have been doing well, one option is to carve off a lump sum to buy a deferred annuity that will guarantee a monthly income ten years down the road. A portion of your ...
