Five Times When An Annuity Makes Sense

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Jim Lorenzen, CFP®, AIF®
Jim Lorenzen, CFP®, AIF®

My recent blog posts,  as well as on this platform, discussed the advantages of arranging assets early – ten years or more before retirement – to lay the groundwork for an income-tax free retirement.  Many experts believe it’s time to dump the stock-market-based approach in favor of an insured retirement solution – see Time To Rethink the 401(k).

Planning for an income tax-free retirement is very doable for many people, though not everyone, to be sure.  I’ve even posted a recorded webinar on this subject (Note:  It’s about an hour long; so get some coffee and get comfortable).

Then there’s the Obama administration’s Green Book, which I discussed last week, detailing budget and tax proposals for the coming year.  It leaves little doubt, if there was ever any, that the government will be looking at all types of retirement vehicles (401(k)s, IRAs, Roth IRAs, etc.) – vehicles the government created, regulates, and is therefore in a position to write the rules.  You can see that post here.

Of course, there are other insured solutions, designed to address the issue of longevity risk – we do seem to be living longer; and, some are worried that their money won’t last as long as they will.

Last week, Rich Lane of  Magellan Financial outlined five reasons annuities can make sense, especially for financially conservative investors who want to build and protect their assets.   He was talking about fixed annuities (which is good – I must admit I am  not a great fan of variable annuities; but, that’s another story.

6a017c332c5ecb970b01a3fd41160b970b-320wiThose who remember losing money back in the economic downturn are often  interested in a vehicle that has a guaranteed minimum rate of return – something few alternatives offer; and that’s one of the reasons why the fixed annuities industry is seeing strong sales growth.

Fixed deferred annuities can provide a predictable future with flexible payout options that offer a guaranteed income stream, and those earnings aren’t taxed until the funds are withdrawn.  In effect, they are treated as a source of income, just like a pension.  So you can think of it as your own “pension” that you fund yourself.

A deferred indexed annuity – a fixed annuity with an interest crediting rate that’s linked to an outside market index of some type – can be “turned on” before or after retirement to create a liquid stream of income.    When you think about it, how many investments do you know of — other than a fixed annuity — that can provide a predictable and guaranteed stream of income?

Banks?  Maybe.  But, during the Great Depression, banks across the country closed.  Insurance companies thrived (risk management is their business).   Bonds?  Maybe.  But, governments seem to habitually spend beyond their means and you face interest rate risk when it’s time to reinvest at maturity.  Bond ladders can reduce this risk; but, few people in their second decade of retirement want to spend their time tracking the bond markets.

Here are Rich Lane’s five reasons an annuity might make sense for you:

  1. Safety: Fixed annuities can ensure that if anything should happen to you, your surviving spouse has a source of continued income in place.  This can help in case of a catastrophic illness or if there should ever be a need to enter a nursing home.
  2. Liquidity: Today’s challenging economy has heightened interest in liquidity.   Many hesitate to make long-term financial commitments without flexibility and access to funds – even if it means creating an income stream should they need it.
  3. Tax deferral: The tax benefits of fixed annuities are important to many.  Because earnings will not be taxed until withdrawals are made or regular distributions start, annuity owners can benefit from triple compounding: earning interest on principal, interest on interest, and interest on tax savings.
  4. Control: Another appealing aspect of fixed annuities is the ability to choose a predictable income stream.  Lifetime income options provide clients with the control of selecting payments that are guaranteed to continue for life.
  5. Wealth transfer: Financially-conscious investors tend to be keenly focused on what happens to their money after they pass away.  Annuities can bypass a lot of red-tape and provide greater control over outcomes.

It’s worth remembering that no investment, vehicle, or strategy will be right for everyone; and no investment or vehicle should be regarded as “the answer” to all your needs.  Creating a retirement strategy is more like assembling a puzzle.  There are always trade-offs.  The key is not to get blinded by single issues; it’s really about finding the mix of solutions that create a master strategy for accomplishing your prioritized goals.
Do you know how much risk is embedded in your current investment and retirement portfolio?  If you’d like to find out your risk number, you can begin here.



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Jim Lorenzen, CFP®, AIF®

Jim Lorenzen is a CERTIFIED FINANCIAL PLANNER® professional and An Accredited Investment Fiduciary® in his 21st year of private practice as Founding Principal of The Independent Financial Group, a fee-based registered investment advisor. He is also licensed for insurance as an independent agent under California license 0C00742.  IFG helps specializes in crafting wealth design strategies around life goals by using a proven planning process coupled with a cost-conscious objective and non-conflicted risk management philosophy.

Opinions expressed are those of the author.  The Independent Financial Group does not provide legal or tax advice and nothing contained herein should be construed as securities or investment advice, nor an opinion regarding the appropriateness of any investment to the individual reader. The general information provided should not be acted upon without obtaining specific legal, tax, and investment advice from an appropriate licensed professional.

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Jim Lorenzen is a CERTIFIED FINANCIAL PLANNER® professional and An Accredited Investment Fiduciary® in his 21st year of private practice as Founding Principal of The Independent Financial Group, a fee-based registered investment advisor. He is also licensed for insurance as an independent agent under California license 0C00742.

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