When I was a kid, my father taught me to play chess.
He’s a doctor, a master at thinking ahead, and he wanted me to learn that kind of discipline.
That’s what chess is all about — plotting and thinking three, four or five moves ahead. Now, as an adult, that’s how my brain is wired. It’s why I like working with people to plan their retirement incomes.
I see clients all the time who are worried that the money they’ve saved and invested won’t last their lifetimes. They might have 401(k)s or some other retirement accounts, plus Social Security, but they don’t know if that will be enough.
The good old days of pensions
Back in the day, people had pensions through their employers — monthly income they knew they could count on when they no longer earned a paycheck. Pensions weren’t without problems. You didn’t have control over how the money was invested; and if you passed away prematurely, the money might not be transferrable to your children. However, the guaranteed income from a pension gave retirees some much-needed peace of mind.
Unfortunately, pensions are disappearing. Most employers aren’t providing them anymore, and many are offering lump-sum buyouts. Baby Boomers and the generations behind them are searching for some kind of replacement — something that will help them find confidence in their finances, with the same kind of protection their parents’ pensions gave them.
That’s why the topic of annuities comes up, and it’s often an unpleasant conversation.
Annuities take some heat
Annuities aren’t perfect, as they aren’t for everyone. They are a constant target for criticism from financial columnists and others in the media.
Individuals seem to pay attention to those opinions, and they are careful to ask questions. They are understandably nervous about annuities after reading those reports.
“Reid,” they say. “Ken Fisher hates annuities! He actually wrote a column titled ‘Why I Hate Annuities.’ He screams it in his ads. Fisher is Forbes’ longest-running columnist, an author and a billionaire investment analyst; so why would I fall for what he calls ‘the cigarettes of the investment world’?”
I don’t disagree with Fisher, but as many critics fail to point out, annuities have both upsides and downsides. As he says, the contracts can be “huge, obtuse and confusing.” The fees are sometimes high (they can exceed 4% a year), there can be limits on the income benefits and how income credits are calculated. There may be rider charges, and surrender charges if the holder decides he wants out before the term is up. I’ve seen policies that exceed 10 years. It can be hard for consumers to imagine leaving their money in that policy for a decade and hoping it does well or having limited access to those funds. That’s why it is vital for consumers to find a financial professional who can help determine whether an annuity is appropriate for them and, if so, find the appropriate one.
But annuities can have a good side, too
So, why would anyone consider buying one of these financial vehicles? Why would retirees go for an annuity, when they can easily open a brokerage account that gives them more control and unlimited access to their money with potentially lower fees?
My answer: Annuities can be an appropriate piece of an income plan for some retirees, as they create the reliable, structured income stream that people miss in pensions. Without a pension, an annuity is a natural consideration as a substitute, as long as people understand their downsides.
In addition, annuities can help people become disciplined investors.
Too many people let their emotions guide their investment decisions. If the markets go down, they panic and want to sell because they worry their lifestyles — their retirement dreams — will be damaged if they continue to lose money. On the flip side, if the markets are going up, it defeats the purpose of growth if they get greedy and sell.
If they have an annuity, they have a backup in good times and in bad. It gives their plan more diversification and helps them to keep emotions out of their financial decisions as an annuity is a long-term financial vehicle.
The bottom line
An annuity helps creates a balanced approach, and we know that balance works in everyday life. That’s true with eating, drinking and, yes, even income planning.
I am absolutely not saying that you should go out and buy just any annuity. I repeat: They. Are. Not. For. Everyone. There are different kinds, and those differences can be complex.
But if you’re working with a qualified professional, he or she can take a look at your entire situation — what you have and what you don’t, your risk tolerance, your time horizon and your goals — and design a plan that may or may not include an annuity.
If you’re a planner — if you’re thinking five moves ahead and looking for a way to remove potential threats to your golden years — don’t say no to annuities until you’ve had that talk.
Kim Franke-Folstad contributed to this article.
The appearances in Kiplinger were obtained through a PR program. The columnist received assistance from a public relations firm in preparing this piece for submission to Kiplinger.com. Kiplinger was not compensated in any way.
Reid Abedeen is the managing partner at Safeguard Investment Advisory Group, LLC (opens in new tab). He holds California Life-Only and Accident and Health licenses (#0C78700), has passed the Series 65 exam and is an Investment Adviser Representative registered through the Financial Industry Regulatory Authority.
This Week in Cannabis Investing: Safe Banking Act in Focus During Lame-Duck Session
Marijuana advocates are hoping the outgoing Congress will take action on the Safe Banking Act, legislation that will improve cannabis companies' access to finance.
By Morgan Paxhia • Published
Kiplinger's Weekly Earnings Calendar
stocks Check out our earnings calendar for the upcoming week.
By Karee Venema • Published
Can You Build a Retirement Income Plan With Both Risk and Reliability?
Two strategies for making retirement savings last — probability-based income planning and guaranteed income planning — can help ensure you have what you need in your golden years, but which is right for you?
By Scott M. Dougan, RFC, Investment Adviser • Published
5 Financial Wellness Tips to Help Weather the Winter
You can regain some control over today’s money pressures by exploring your employer's financial support options and benefits, making plans to save and taking other simple actions.
By Aaron Harding, CFP® • Published
10 Common Investing Mistakes That Can Easily Be Avoided
Some of these missteps might be a given when you’re starting out. A financial adviser offers tips on how to stay on track for years to come.
By Vincent Birardi, CFP®, AIF®, MBA • Published
I'm a New Widow. Who Are the Experts I Should Consult?
A support network of experts who can help a new widow can be just as important as your personal support network at such a difficult time.
By Stacy Francis, CFP®, CDFA®, CES™ • Published
Is Your Money Really Working for You? A Math Lesson in Rates of Return
Getting a high average rate of return does not necessarily equate to actual money in our pocket. A personal finance expert explains why math doesn’t equal money.
By Kyle Winkfield • Published
What’s Standing in the Way of Your Successful ‘Money Mindset’?
Many of us have common biases that keep us from making the best financial, and other, decisions. Knowing what they are and addressing them can help us set a new path forward.
By Ali Swart, CFP®, MBA • Published
Getting Ready for Retirement? We Explain Key Elements and Options
Retirement savings are just one component of your financial profile once you hit your golden years.
By Cory Chapman, Investment Adviser Representative • Published
3 Deadly Sins of Delaware Statutory Trusts
DSTs can be highly attractive to real estate investors, but it’s imperative to temper expectations and consider the big picture before diving in.
By Daniel Goodwin • Published