June 3, 2024 Weekly Update

We do love it when someone refers a family member or friend to us.  Sometimes the question is, “How can we introduce them to you?”   Well, there are multiple ways but a very easy way is to simply forward them a link to this webpage.

Here are this week’s items:

Portfolio Update:  Murs and I have recorded our portfolio update for June 3, 2024

Annuitization Versus Deferred Annuities in Retirement

Radon and Murs discuss the concept of annuitization and immediate annuities versus deferred annuities. Annuities can come from different sources, such as insurance companies or municipal pensions. Listen in to learn how immediate annuities work, their pros and cons, and risks such as the potential loss of the principal if the annuitant dies early. You will also learn how…


Annuitization Versus Deferred Annuities in Retirement

Learn how deferred annuities work, the fixed type of deferred annuities, and why they make more sense for retirement planning than immediate annuities.

Understanding Annuitization Versus Deferred Annuities

When planning for retirement, many clients ask us about annuitization and how it compares to deferred annuities. This topic often causes confusion, so we aim to clarify the differences and benefits of each option to help you make informed decisions about your retirement income. 

Types of Annuities 

There are two primary types of annuities: 

  1. Immediate Annuity: You invest a lump sum of money and start receiving payments almost immediately. 
  1. Deferred Annuity: You invest over time, allowing your money to grow before you start receiving payments. 

What is Annuitization? 

Annuitization means converting your investment into a stream of income. This process allows you to secure a reliable income during retirement. However, it’s important to understand the specifics: 

  • Lump Sum to Income: You provide a lump sum to an insurance company, which then guarantees a regular payment for life. 
  • Risk and Reward: If you live longer, you benefit from a steady income. If not, the remaining funds typically do not go to your beneficiaries. 

Example Scenario: 

  • You invest $100,000 into an immediate annuity. 
  • The insurance company calculates that you will receive $500 monthly for the rest of your life. 
  • If you live a long time, this can be advantageous. If not, the insurance company retains the remaining funds. 

Adding Protections to Your Annuity 

To mitigate the risk of losing your investment early, you can add protections: 

  • Joint Annuitization: Adding a spouse as a beneficiary ensures they continue to receive payments after your death, albeit at a reduced rate. 
  • Period Certain: Guarantees payments for a specific period, even if you pass away early, ensuring your beneficiaries receive the income. 

Immediate Annuities: Considerations 

Immediate annuities can provide peace of mind with guaranteed income but may not always be the best financial choice. For instance, one client needed to live until 102 to break even on their investment. While it provides security, it might not offer the best return on your money. 

Security vs. Growth: 

  • Peace of Mind: Immediate annuities offer the security of a fixed income, which can be comforting for those worried about outliving their savings. 
  • Limited Growth: However, the lack of growth potential means that your money doesn’t work as hard for you. For those who have saved diligently and are financially secure, this might not be the most efficient use of their funds. 

Deferred Annuities: A Balanced Approach 

Deferred annuities offer more flexibility and growth potential compared to immediate annuities, making them suitable for good savers who want to maximize their retirement funds. They come in two forms: 

  1. Fixed Deferred Annuities: Provide a safe place to grow your money with predictable returns. 
  1. Variable Deferred Annuities: Offer the potential for higher returns but come with more risk. 

Fixed Deferred Annuities: 

  • Predictable Returns: These annuities grow at a fixed rate, providing stability and peace of mind. They are ideal for conservative investors who want to avoid market volatility. 
  • Indexed Growth: Some fixed deferred annuities are linked to an index like the S&P 500. This allows you to benefit from market growth without exposing your principal to risk. For example, if the S&P 500 performs well, your annuity’s value increases, but if the market underperforms, your principal remains protected. 

Variable Deferred Annuities: 

  • Higher Potential Returns: These annuities invest in a variety of sub-accounts, similar to mutual funds. While they offer the potential for higher returns, they also come with increased risk. Your returns will vary based on the performance of the underlying investments. 

Making the Right Choice 

Choosing between annuitization and deferred annuities depends on your unique financial situation and retirement goals. Here are some key considerations: 

  • Financial Goals: What are your primary financial goals for retirement? Are you looking for security and a guaranteed income, or are you willing to take on some risk for the potential of higher returns? 
  • Risk Tolerance: How comfortable are you with market volatility? Fixed deferred annuities offer stability, while variable deferred annuities come with more risk but also higher potential rewards. 
  • Life Expectancy: How long do you expect to live? This can impact whether an immediate annuity makes sense for you. If longevity runs in your family, an immediate annuity might be more attractive. 

We recommend discussing your options with a financial advisor to determine the best strategy for you. Our team is here to help you navigate these decisions and find the right solution for your retirement plan. 

Ready to explore your options and secure your financial future? Click here to schedule a 15-minute call to discuss annuities and your retirement plan