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Q&A With Scott Burns: Some Annuities Are More Useful Than Others
FYI: Q. My wife and I are both 63. We feel well positioned for retirement in three more years. Our financial adviser has suggested that we move some money currently in CDs into annuities in order to earn more interest and save on taxes. Regards, Ted http://assetbuilder.com/scott_burns/some_annuities_are_more_useful_than_others
Either Mr. Burns or I am misreading the second question.
The couple has (or will have) $500K from downsizing home in addition to the $430K "nest egg". That $500K will be tax-free (profit on sale of primary home), so they have $930K to work with. At a 4% withdrawal rate, that's $37,200/year (inflation adjusted), well in excess of the $30K cash flow they are looking for.
Yet Mr. Burns writes not about how to invest that money (especially since they are concerned about poor advisor performance), but how to accommodate travel plans and cut back in later years. The question is not one of cash flow (which is how he characterized it), but of investment allocations.
At least IMHO he is closer to the mark on the annuity question. Translating his first paragraph, he's advocating fixed annuities, either immediate or deferred, with or without term certain (once annuitized in the case of the deferred annuity).
Though I could be mistaken about the term certain. He might be talking about a "term certain only" annuity, which IMHO has limited use. This is an annuity that pays out for exactly a fixed number of years - it doesn't depend on anyone's lifetime. It might make sense for the couple in the second question if they were planning to travel for, say, the next fifteen years only.
But then a temporary life annuity might be a better fit - this also terminates after a fixed number of years, but may terminate earlier if the couple dies beforehand. By forfeiting claims after death (giving up the "certain" part), one can get a higher payout rate.
There are lots of different ways to structure payouts, and you can usually find annuities providing whatever you really need, without as Mr. Burns put it transferring wealth to the insurance companies. Including VAs, both immediate and deferred. You just have to look for them and not listen to salespeople.
Comments
The couple has (or will have) $500K from downsizing home in addition to the $430K "nest egg". That $500K will be tax-free (profit on sale of primary home), so they have $930K to work with. At a 4% withdrawal rate, that's $37,200/year (inflation adjusted), well in excess of the $30K cash flow they are looking for.
Yet Mr. Burns writes not about how to invest that money (especially since they are concerned about poor advisor performance), but how to accommodate travel plans and cut back in later years. The question is not one of cash flow (which is how he characterized it), but of investment allocations.
At least IMHO he is closer to the mark on the annuity question. Translating his first paragraph, he's advocating fixed annuities, either immediate or deferred, with or without term certain (once annuitized in the case of the deferred annuity).
Though I could be mistaken about the term certain. He might be talking about a "term certain only" annuity, which IMHO has limited use. This is an annuity that pays out for exactly a fixed number of years - it doesn't depend on anyone's lifetime. It might make sense for the couple in the second question if they were planning to travel for, say, the next fifteen years only.
But then a temporary life annuity might be a better fit - this also terminates after a fixed number of years, but may terminate earlier if the couple dies beforehand. By forfeiting claims after death (giving up the "certain" part), one can get a higher payout rate.
There are lots of different ways to structure payouts, and you can usually find annuities providing whatever you really need, without as Mr. Burns put it transferring wealth to the insurance companies. Including VAs, both immediate and deferred. You just have to look for them and not listen to salespeople.