Time to Re-Think Annuities in Retirement

Annuitization is a fancy word for starting a lifetime stream of income, typically from an annuity. I ran across an academic study that tried to answer one simple question: why don’t more middle-income retirees annuitize? In other words, how come average retirees typically won’t purchase an annuity to generate lifetime income?

According to the study, existing retirees are already highly annuitized. When you consider the current value of Social Security payments and payments from employer pension plans, today’s average retiree has 85-95% of his or her wealth tied up in “annuitized” income sources like Social Security and pensions. So according to the study, there’s not much benefit in annuitizing any other retiree resources.

Now that’s an interesting conclusion from an academic perspective. I can honestly say that I’ve never heard a retiree make a statement like “I don’t want any more guaranteed income; I have enough already.” On the contrary, many retirees are looking for additional lifetime income sources, especially given today’s relatively low interest rates and longer life expectancies. So unless today’s retirees have some type of subliminal economic insight that I’m not aware of, I don’t think the study quite hit the nail on the head.

What the study did accurately point out was that retirees (like the Baby Boomers) will be in a different situation over the next 20-30 years. A fair number of older retirees enjoy good old-fashioned pensions from their former employers. But employers nowadays have mostly abandoned pension plans, turning instead to retirement plans that allow their employees to share in the cost of saving for retirement, such as 401ks and 403bs.

For these retirees, Social Security may be the only “guaranteed” source of retirement income (and we all know the Social Security system is in financial trouble). So purchasing annuities in retirement will likely become more normal for retirees in the future. If you think of life insurance as protection against unexpectedly dying too soon, annuities are insurance against unexpectedly living too long. And other than Social Security, annuities are the only game in town that can promise you lifetime income.

So for those of you nearing retirement now or in the next decade, it may be time to re-think whether you want to annuitize part of your retirement savings. Your retirement income picture probably won’t look like your parent’s. It may be time to give annuities a second look to help maximize your retirement readiness. What do you think?


About Mike Wilson

Michael L. Wilson, MBA, CFP®, CRC®, is the owner of Integrity Financial Planning. Prior to founding Integrity in 1998, he worked for two years as a faculty member at the College for Financial Planning in Denver, training other financial advisors. Mike has 10 years of experience in the mutual fund industry, having worked with Fidelity Investments and Invesco Mutual Funds. He holds an MBA in Finance from Baylor University. Learn more about his work at www.integrityplanner.com.
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