The 5 Years Before You Retire: Retirement Planning When You Need It the Most | Chapter 3: Income in Retirement - Part 2

When I finished my internship with Tim back in 2020, I got him a thank you gift. It was a custom T-shirt that said “Brockmann’s Philosophy of Annuities.” On the back: “Overpay and Underperform.”

While mostly a joke and surely an oversimplification, if you’ve been a client for many years you know Tim is light on annuities. (The two exceptions in his career: around 2008/2009 when there were very high income riders, which many of our clients still benefit from today; secondly, in 2022-2023, the buffered annuities or registered indexed linked annuities “RILAs” which multiply returns beyond their underlying index price returns - these have also very lucrative for our clients so far).

That said, the fact that (income) annuities are typically expensive and underperform direct market investments is part of their features, not a bug. Everything has its price, and this is the price you can pay for consistent, contractually guaranteed income to last a long period, even your entire life (or longer).

Barring the solvency concern, everybody loves their consistent Social Security income check that comes without change regardless of market fluctuations or interest rate changes. “Social Security” is just a made up name for a government required annuity (it’s not government funded, they take 12.4% of your paycheck annually during your working years…). One of the reasons people love their Social Security check is that they don’t know what it cost them. To get a $3,000/month benefit that increases annually like Social Security would cost around $800,000 or more.

In this chapter, Birken explores “income annuities” and “deferred fixed annuities”. Here is her summary chart:

There are many other types (RILA, variable, etc.), and many bells and whistles that can be added to each, but at the core, an annuity is a transfer of risk. In an investment account, the account owner retains various risks (and is often handsomely rewarded), while an annuity transfers some of the risk and some of the reward to an insurance company. If you have an investment solely with one company's stock, and they go out of business, the value of your ownership goes to $0. If you invest in an annuity, the insurance company will take on that risk and guarantee you a return (one version is similar to a CD). They can do this because they anticipate earning well beyond what they pay you.

Some argue that annuities should be thrown into the pit, and others see them as the solution to every financial problem. It’s easy to be an extremist, it’s not as easy to think about the nuances and factors that require time and wisdom in making each decision. There are situations where an annuity is a fitting part of someone’s financial plan. If you have more than you need or want, if you are overly concerned about market fluctuations (which candidly means we’re likely not doing our job as well as we could), and if you have trouble spending your savings/investments, then an annuity might be a good fit for you.

It seems we’ve run out of room again without answering our approach to income. We’ll take one more week next week to examine this before moving on.

Let us know

• If you are receiving your Social Security income, how do you feel about your monthly check? If you are not yet receiving it, how do you feel about that future income stream?

• How much would you pay for a monthly income check of $3,000/month that increased annually (like Social Security or your work paycheck)?

Until next time, happy reading!