Stop Hating Annuities: They Can Actually Help With Retirement Planning
Annuities have a terrible reputation in personal finance circles and honestly some of that is deserved. Predatory salespeople have pushed unsuitable products on seniors for decades. Variable annuities with absurd fee structures have enriched advisors while impoverishing clients. The industry has earned its bad press through years of genuinely awful behavior. But somewhere along the way, the criticism went too far and now people dismiss ALL annuities which is throwing the baby out with the bathwater.
Heres the thing about retirement that nobody wants to talk about – you might live a really long time and you have no idea how long exactly. Thats the fundamental problem that makes retirement planning so difficult. Save too little and you run out of money. Save too much and you denied yourself experiences while working that you could have afforded. The uncertainty is killer and most financial tools dont actually solve it.
The One Thing Annuities Actually Do Well
Simple immediate annuities – not the complicated variable products with a dozen riders – solve longevity risk cleanly. You give an insurance company money, they pay you a fixed amount every month until you die regardless of when that is. Live to 65 and they keep most of your premium. Live to 105 and they way overpay compared to what you contributed. The insurance company pools risk across thousands of people and can afford to lose money on the long-lived ones because they profit on the short-lived ones. Its actually elegant if you think about it.
The coming changes to 401k plans might make simple annuities more accessible through workplace retirement accounts which would be genuinely good for most people. Buying annuities directly from insurance companies is a confusing nightmare full of salespeople working on commission. Having your employer pre-screen options and offer them through familiar interfaces removes a lot of the friction that currently makes annuities hard to access responsibly.
When Annuities Make Sense And When They Dont
Annuities work best as part of a broader strategy, not as a total solution. Converting SOME of your retirement savings into guaranteed income makes sense – enough to cover basic expenses so you never have to worry about keeping the lights on. But keeping some money in stocks and bonds lets you maintain growth potential and flexibility for unexpected needs. The goal is a floor of guaranteed income plus a pool of flexible assets.
They make less sense if you have strong reasons to expect dying young – serious health conditions, family history of early mortality. They also work poorly if you cant afford to give up access to a significant chunk of your savings. And variable annuities with expensive insurance features rarely make sense for anyone despite being the products most aggressively marketed.
The blanket hatred of annuities in financial media does real disservice to people who could benefit from the longevity protection they offer. Yes be skeptical of salespeople. Yes avoid complicated products you dont understand. But dont dismiss the entire category just because bad actors have abused it. Simple annuities solve a real problem – the risk of outliving your money – and for many retirees thats worth serious consideration.
The personal finance influencer community tends to be young and focused on accumulation rather than decumulation. Their advice is great for building wealth in your 20s and 30s but less relevant for spending it in your 70s and 80s. Different life stages have different needs. Products that make no sense early in life might make perfect sense later. Dont let the internet consensus among people decades younger than you determine how you should think about retirement.
If youre approaching retirement and worried about running out of money, at least research annuities properly before dismissing them. Read academic studies on optimal retirement portfolios. Talk to actual retirees about their experiences. Understand what problem longevity insurance solves and decide whether thats a problem you have. The answer might still be no – but it should be an informed no based on your specific situation, not reflexive no based on what some blogger said about a product category they dont fully understand.
