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Do Annuities Belong in Financial Planning?


Market downturns of the magnitude we have experienced lately elicit a wide range of emotions from investors; some are happy smiles (mostly from young investors), but others include fear and anxiety. Most long-term investors are aware that time heals bad markets, but it is difficult to fault anyone who is feeling distressed over swiftly falling account balances.

Fear of death has been shown to be less scary to most people than fear of outliving their money. Occasional market routs illustrate to us that only a handful of Americans are so financially well-off that they have virtually no risk of going broke. Reacting to downturns in a positive manner may be difficult without good advisors. Seeking excessive safety often results in making poor financial decisions.

The term annuity refers to any financial asset that provides lifetime income to the owner. Lifetime income is among the goals set forth in any comprehensive financial plan. Very few lifetime income vehicles exist, and all have some drawbacks. Many, such as work-provided pensions, both public and private, are simply unavailable to most people. Social Security is widely available, but inadequate for complete retirement funding. Further, most lifetime income streams lose purchasing power over time, due to inflationary influences on our daily cost of living. In many cases, Social Security and pensions need to be individually supplemented.

Social Security is the most common lifetime annuity in the U.S. Most people do not think of Social Security as an annuity, but it is. Other lifetime income streams are provided by private and public pensions. Social Security is not to be confused with a public pension, which is earned over years of employment by the government.

Throughout our years in the financial planning business, we have come to describe Social Security as “the world’s greatest annuity.” Imagine a financial product that can tax citizens to fund the Plan, rather than to depend solely on the individual annuity owner!

Unfortunately, Social Security was never designed to be the sole source of retirement income for any participant. Making matters worse is the loss of purchasing power experienced by recipients due to insufficient Social Security Cost of Living Adjustments, or COLAs. In the past ten years alone, Social Security benefits have lost 18% of their purchasing power. Many private pensions have no COLA whatsoever, and lose purchasing power even faster than Social Security.

Obviously, depending only on Social Security for retirement income is a losing strategy, and most of us will have no pensions. That leaves private annuities as the only fallback products to supplement needed lifetime income.

Annuities are misunderstood (and often maligned) by most people, a situation exacerbated by unscrupulous insurance salespeople using misleading sales pitches. Unfortunately, the result is that too many inappropriate annuities are sold to unsuspecting customers, leaving gaps in their lifetime needs and/or nest egg values. Most often this situation arises from an unscrupulous quest for large commissions by the salespeople.

Solving for lifetime income is a central concept of Comprehensive Financial Panning. Annuities play a role in the process, and good advisors (preferably fee-only fiduciaries who have earned the CFP® designation) understand how annuities fit into a lifetime income plan. We understand the specific and limited role annuities play when assisting clients to not outlive their money. Annuities occupy an important role in financial planning, but their judicious use is critical to success. 

Van Wie Financial does not sell insurance products, and we never receive compensation from people who do sell annuities and other insurance products.

Van Wie Financial is a fee-only fiduciary firm.   For a reason.