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Annuities – what are they? Do I need one?

401(K) 2012

Annuities may be a useful tool in your retirement income toolkit. But they are no substitute for a plan.

An annuity is guaranteed money in your mailbox every month.


The most common way to get that check coming your way is to make a contract with an insurance company (that’s what’s happening when you buy an annuity). You may either give them a lump sum of money (for example, $100,000) or you may make a series of payments to them (such as $1,000 per month).

Then they take your money and calculate what size check they can send you each month, guaranteed for life. Because they are performing this calculation on a large pool of people, they can use life expectancy tables to figure out how long the money is going to have to last, on average. That’s why they can safely make the “for life” guarantee, when such a promise would very risky for any single person (what if they lived to 110?).

As most people age, their appetite for risk decreases. And once they hit the exit door at work and enter retirement, that risk tolerance really takes a plunge (again, in the average person). The reasons for this are obvious – since they are no longer working, the money they’ve managed to save and invest is all the money they’ve got. It has to last. No room for error.

For this reason, a guaranteed and predictable stream of income looks mighty attractive to most retirees.

On the other hand, once your income is set, it’s set. No do overs. So if we see a return to runaway inflation (seems like a million miles away now, but…) that steady income could end up buying less and less of the things you want.

For these reasons, I’d say the people I’ve seen in retirement who are most content are those with a source of fixed income to cover their basic living expenses and a nest egg of guaranteed savings and conservative investments that can pick up the extras, whether that means unexpected needs or planned for wants.

Mary had about $1,000 a month coming in from Social Security and told me she wanted another $1,000 of guaranteed income. Being a single woman, she wanted to know that “no matter what,” her basics would be cared for.

Mary also had some money in a retirement plan, which she and her advisor put in a portfolio that would likely grow over time, but that they both knew she didn’t need to touch right now.

This balance works just right for Mary. But it works because she and her advisor first made a plan for what Mary wanted and needed in retirement, and then they set about executing the plan with the most appropriate financial tools available to them.

For Mary, an annuity was one of those tools.

Annuities can be a powerful and efficient part of an overall strategy. But they are no substitute for a well-conceived plan.

Don’t confuse the tools and the blueprints.

Offering you Wisdom on Wealth, I’m Byron Moore

Byron is a Certified Financial Planner and Managing Director of the Planning Group at Argent Advisors, Inc.
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