Welcome to how to retire on time, a show that answers your retirement questions. Say goodbye to that oversimplified advice you've heard hundreds of times. This show is all about getting into the nitty gritty. Now that said, remember this is just a show, not financial advice, so do your research. As always, you can text your questions to (913) 363-1234, and we'll feature them on the show.

David, what do we got today?

Hey, Mike. I'm really conflicted whether or not I should buy an annuity for income. Can you provide some insight? Yeah. This would be one of the ways don't you have an article where you talk about at least 10 different ways to draw income in retirement?

Yeah. It's one of the 10 common ways that people take income in retirement.

Okay.

Not right or wrong. And what I think is interesting is it's because people don't wanna give up control. They don't wanna give up this idea, and I don't blame them. Would I buy an annuity and turn on lifetime income? I don't know that I would.

I wrote the book, how to retire on time, as an argument against the lifetime income stream. So knowing that I'm compromised in how my thought process is, and to answer this question, I'm gonna do my best to be as objective as I can.

They don't wanna give up control. By taking income from an annuity, are they then they're losing control over what are they losing control of?

Yeah. So let's run a scenario. Let's say you get a million dollars. Alright. You could put all of your assets into a stock bond fund portfolio, and let's assume a 6% growth each year.

Yeah. Easy peasy. Then let's look at a complementary scenario, and let's say we're gonna put 200,000 to a fixed indexed annuity or a SPES, single premium instant annuity, or really any annuity that's gonna pay you income out of the gate

Okay.

Within a year's time. And let's say that that's gonna pay you around and these are I'm not quoting products here, but let's say it's gonna give you 8% of whatever you put in there for life doesn't grow, so it's going to erode over inflation. You got tax risk. You got all sorts of risks, but it's gonna pay you a lot upfront.

Okay. So, yeah, we put 200 k in, is that what you said, and then you get 8% of that Yeah. Every year, quarter, or a month.

It's not really gonna grow well in value. Cash is gonna be drained really quickly. But what people don't realize is the teamwork that's happening in that kind of situation, and I'll be the first to admit as much as I personally would probably not do a lifetime income stream, I can see why people might want it from a legacy standpoint or just from a portfolio structure standpoint. And here's why. Taking income as a guaranteed income source at a higher rate means your portfolio takes less income to satisfy your income needs.

There's less income coming out of the portfolio. So there's less money coming out of the portfolio. It's got more money staying in there to be able to grow. Sure. Right?

Yeah. Generally speaking, you're taking four to 5% out of your portfolio overall, or you could put some money, get 8%. So the first couple of years before inflation really erodes it, it allows your portfolio to grow. That gives you a competitive advantage. Now if you look at the combination of the cash value of both assets, so a portfolio and then an annuity, the first ten to fifteen years, you're gonna see probably your projection to be lower, your estate to be lower with the annuity because the 200,000 is gonna get drained pretty quickly.

That's why you see caps of, like, up to 3% on fixed index annuities because they're not meant to make you rich. It's just the insurance company has to give you your money if you don't spend it all, so they wanna limit your growth so that it goes down fast so that most people in the pool of people that have bought these lifetime income streams, that they should die before life expectancy. That's why the actuaries are calculating all of this, so that the few that are healthy and live a long time benefit.

Mhmm.

But what's interesting is because it alleviates some of the income stress from the portfolio early on, the portfolio is able to then grow. And so around fifteen, twenty years or so from when you start, you actually will probably have more money in your portfolio because of the annuity.

Oh, interesting. And you've run some simulations to kind of figure this out?

Yeah. I mean, if you die let's say you're 60 years old and you retired then, and you were comparing these options, if you died within fifteen years, you'd probably have less dollars with the annuity option. If you lived longer than fifteen years, you might have more. Mite's the keyword. A lot of assumptions here, but the idea really boils down to what's gonna allow you to sleep well at night, and what benefits do you want, and which detriments are you okay living with?

And you really gotta look at it from that standpoint. Run a couple of plans and just compare the options. People love to hate annuities because it's, oh, it's well, it's an insurance company. People love to hate insurance companies.

Oh, yeah.

Two, there are many companies out there that manipulate their marketing materials and say things like, well, I hate annuities, and everyone should hate annuities, and they get paid if you put your money in their portfolio, not an annuity.

Oh, right. They're incentivized to get you to put your retirement dollars with them instead of an annuity, so they'll find ways to Yeah.

Yeah. Kind of a conflict of interest. Yes. So are they good or are they bad? Who's to say what's right for you?

Let's look at it from an emotional standpoint first. Which way are you gonna be able to sleep well at night? A lot of people are very comfortable not buying lifetime income. A lot of other people are very comfortable because they bought lifetime income. And who's to say which is right for you?

Only you can really answer that question.

Yeah. Maybe I'm a person who just can't stomach the roller coaster of the market, and so I want to know that I've got at least this base, and this insurance product will give me that base.

Yeah. Now there's other ways that you could structure this too. I think this is interesting. Again, trying to be fair to this space.

Okay.

You've got lifetime income. That's an option. Another one you've got is ten year period certain. This is a commonly implemented strategy where you basically buy a ten year period certain annuity. So you're gonna buy it, turn on income.

It's gonna pay out structure payout for ten years. Does not matter what the markets do. You know exactly what you're gonna get over those ten years.

That's the period certain, the ten years?

Yeah. Then you take your other assets, and you don't need to touch it for ten years.

You just grow it. Yeah. So that ten years that you're taking income from the annuity, the rest of your assets, you don't have to touch. They can grow. They can go up and down.

Yeah. I mean, what if you could take 60% of your assets, generate all the income that you needed for the next ten years, and then the 40% was able to grow, and then you just rinse and repeat. That is a strategy that some people do, and they like the period certain option, because even if they died, the beneficiaries will receive the payments until the certain period is over.

Oh, okay.

Now another one that I I am I'll admit more partial to is the five year period certain.

Okay. Yeah. Why are you partial to that one?

The average market crash is pretty significant. Markets can go down pretty hard, and it might take three to five years for it to recover.

Okay.

So if it takes around five years for it to recover Mhmm. And you don't wanna take income from an account that's lost money, what if you had an annuity that could pay you five years of the income you already wanted, And when the markets crash, instead of you saying, well, what do we do? You just say, okay. Well, here's our income source for the next five years. Don't touch everything.

Let it recover. It bridges the gap.

So you would have to have the foresight. When you're setting up your plan, you put your money into this annuity, but you don't turn on the five year income. You can turn it on whenever you need to. And so if the market crashes, like, okay, now's the time, baby. Here we go.

Yep. That's it. And then

leave the stuff in the market alone. Let it recover. You're taking your income for your five years. It recovers.

Yep. Uh-huh.

That's a good strategy.

And these are typically more cash accumulation annuities that can be annuitized for a short term period of time. So there's different types. Different types of hot chocolate, different types of fast food burgers. Yes. There's different types of annuities.

They all do something different. Uh-huh. But the point being is, it's a strategy. It's a way that you could use it for certain times. That's really it.

Not gonna get you rich, but it helps you from accentuating losses. That's all the time we've got for the show today. If you enjoyed the show, consider subscribing to it wherever you get your podcasts. Just search for how to retire on time. Discover if your portfolio is built to weather flat market cycles or if you're missing tax minimization opportunities that you may not even know.

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