What d’you know about the annuity as a vehicle for retirement strategy?
I’ve always been dubious about them. However… I have a friend, whom I’ve now known for five or six years and whom I believe to be fundamentally honest and above board. Part of his business is financial management, and one his favorite strategies entails setting clients up with annuities.
He points out that if I took about $300,000 of my vast riches — approximately half of investments and cash holdings — and put it in a lifetime annuity with a death benefit of 300 grand, I could generate more than the amount I need to live on for the rest of my life, still have money invested in securities, and leave a guaranteed $300,000 to my son when I croak over.
Given my chronic bag lady syndrome, this sounds pretty tempting.
My concern is that if the prominent oncologist who de-boobed me is right — that I should live to about 95, barring accidents and unforeseen circumstances — I will outlive my money by ten or twenty years and than spend advanced old age in serious poverty.
I do not want to continue teaching freshman comp courses, a job I truly dislike whether in the classroom or online, and I’m certainly not betting that publishing Racy Books for Racy Readers is going to make me rich. Right now I can’t even get accursed Amazon to let me create an Author’s Page for our pseudonymous scribbler, Roberta Stuart.
So, assuming no money is going to come in from side gigs or the S-corp, and knowing the government is shearing the hell out of my savings by forcing me to take large required minimum drawdowns just as the stock market heads back into negative territory, I’m thinking an annuity that would return enough to live on would give me some peace of mind and also allow me to preserve at least SOME capital as I age. And also leave at least something for my son.
Two drawbacks come to mind, as I consider this scheme:
a) it locks up $300,000, which presumably I will never be able to access again; and
b) the payouts do not seem to be inflation-adjusted.
Even though we’re not seeing much inflation now, it would be absurd to assume that we won’t in the future. My father’s retirement was devastated by the inflationary period of the 1970s, which reduced a healthy savings account to…well, not enough to live on. He had signed himself into a life-care community just as that period started, so at least he had a roof over his head and a couple of meals a day. But because of the loss of his dollars’ buying power, he did not have enough to do much other than stay underneath that communal roof and eat in the (awful!) institutional dining hall. That’s even though he started out with the 1960s equivalent of just over a million dollars!
That, IMHO, makes for quite the dreary lifestyle.
US politics grow increasingly negative. Some extremely dangerous fools are trying to attain power, and sooner or later they will succeed. When that happens, the US economy will become even more unstable than it is. So, runaway inflation — or another profound recession like the one that’s taken us 8 or 10 years to come out of — is a distinct possibility. I have no faith in the country’s economic future, and I do not believe the stock market alone is a safe place to keep all of one’s savings.
Nor, obviously, is stuffing the mattress with gold bullion a great idea. The insomnia factor aside, gold bars are too heavy for an old bat to haul to the grocery store.
I’ve talked with WonderAcccountant about the annuity question, as well as the highly knowledgeable Evan at My Journey to Millions.
WonderAccountant thinks I don’t really need to set up an annuity, as she believes there’s enough money in securities to support me into my old age, no matter how much I take out, but she suggests the peace of mind could be worth the hassle and the risk. Evan observes that some annuities are excellent retirement strategies and some are not: they’re complicated instruments that you need to understand fully before you buy.
So, I’m thinking about it.
Even if most of my money were drawn down by the time I died, if I invested half of it in an annuity, my son would inherit my paid-off house and also the $300,000 death benefit. The house is probably worth $280,000 or $300,000 now — but we know how reliable those figures can be. Nevertheless, with a paid off house in hand, he could either sell the house he’s in or rent it, providing a little cash flow for him. Or he could sell this house and use the proceeds to salt his own retirement savings.
But…do I really want to tie up half my savings in an instrument that’s not inflation-adjusted? Twenty-five or thirty grand now sounds, well, just grand. But in ten years, even if inflation stays low, it won’t be enough to keep me going. In 20 years, when I’m 90, I‘ll need over $45,000 to buy what $25,000 buys today. And as for that $300,000 death benefit: if I die at age 90, it will take $541,833 to equate to today’s 300 grand. It will be worth a little more than half of what it’s worth now.
That assumes an inflation rate of just 3%, staying stable over two decades…