When Buying Annuities Makes Sense
These complicated financial products often come with high fees and little liquidity, but here are three reasons I'd recommend them.

For many years I've opposed recommending annuities for my clients. But I've started to change my thinking, especially for people that don't have lifetime pension benefits provided by a former employer.
Annuities typically have some disadvantages, such as high fees and limited liquidity. In addition, these products are often complex and can be hard to understand, even for a well-educated business professional.
But with recent studies showing the average life spans of men and women increasing, people without pensions are often left with a gap in their retirement plans. In addition, I've witnessed firsthand the benefits that annuities provide some clients, including the peace of mind in knowing they have a stable, reliable income in retirement.

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If I think an annuity is a good fit, I bring up this idea around the time a client begins retirement, or even a few years into retirement. Until then, I prefer that my clients have their portfolios invested in more liquid assets that don't tie up a large portion of their capital in a product that might not be needed.
As a fee-only, registered investment adviser, I don't sell commission-based products such as annuities and life insurance. But here are the top three reasons I'd consider recommending a client invest money in an annuity if they don't have a pension or another stable income source in retirement:
1. To Provide a Hedge Against Longer Life Spans
According to the Centers for Disease Control, people who were 65 years old in 2014 will likely live into their 80s. After reaching 65, men can expect to live another 18 years and women an additional 20.5 years. With life expectancies continuing to rise, annuities are making more sense.
Before advising a person to retire, an investment adviser should analyze how to structure a financial portfolio for growth and income, calculate a client's withdrawal rate and have the conversation about the client's personal health and family history of longevity, as both impact how long the client may live. Longer life spans means their money needs to last longer, too.
Because annuities provide a guaranteed lifetime income, it can prevent a retired person from depleting all of his or her assets. And since an annuity is administered by a financial or insurance company, it moves some of the longevity risk to the company offering the annuity product.
2. To Take Control Over Too Much Spending
One of my biggest concerns is preserving wealth for my clients who consistently spend beyond their means, and with these clients, I find that annuities help them better budget their money.
Retirees without a stable monthly income tend to tap their portfolio much more often than they realize. For example, after a recent meeting with a client, we agreed that he would withdraw $20,000 per quarter over the next year. Within a few weeks, he called and requested $10,000 and, five months later, an additional $10,000. So now he's taken out 15 months of living expenses in a 12-month period.
Some retirees also experience what I call "lifestyle creep." For example, if they start retirement with 40% of their expenses covered by a pension or other stable monthly income source, but five years later it's only covering 25%, it can mean their lifestyle is increasing and becoming more costly. The 15-point difference is coming out of their lifetime nest egg. So "lifestyle creep" can be a huge risk that could lead you to run out of money one day.
3. To Have Peace of Mind Over Stock Market Gyrations
For people who have absolutely no stomach for bear markets or stock market volatility, annuities can help prevent them from making what I call "the big mistake"—selling stocks during a big market pullback. If you panic and sell a large chunk of your portfolio in a down market, it's hard to recover especially if you delay reinvesting.
If investing money in annuities can prevent you from destroying your financial security, I'd be open to supporting that choice. Just be sure you purchase an annuity from a trusted specialist.
Lisa Brown is a partner and wealth adviser at Brightworth, an Atlanta wealth management firm. She specializes in investment management, executive compensation, retirement transition and estate planning.
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Lisa Brown, CFP®, CIMA®, is author of "Girl Talk, Money Talk, The Smart Girl's Guide to Money After College” and “Girl Talk, Money Talk II, Financially Fit and Fabulous in Your 40s and 50s". She is the Practice Area Leader for corporate professionals and executives at wealth management firm CI Brightworth in Atlanta. Advising busy corporate executives on their finances for nearly 20 years has been her passion inside the office. Outside the office she's an avid runner, cyclist and supporter of charitable causes focused on homeless children and their families.
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