I grew up in the insurance industry. My father was a life insurance agent. I learned about insurance products at the dinner table as a kid. After I graduated from college, I entered the financial services industry as an advisor for a major life insurance company. I earned my Chartered Life Underwriter designation in my early 20s. So, I have pretty solid understanding of annuity products.
Over the years I have watched the insurance industry develop a vast array of annuity products. These products have become very sophisticated and, one might argue, too complex. In addition, most of them are very expensive. It is not unusual for an annuity to be loaded with expenses that total 2-3%.
So, while I like some of the features of annuities, I have not been particularly inclined to advise clients to purchase them. [Our firm is fee only. We do not sell any financial products.] Most clients do not understand the newer annuity products and few realize how expensive they are.
However, based on several recent articles and white papers, I am beginning to think there may well be a place for a low cost annuity inside a well structured retirement portfolio. Why? Because a guaranteed, fixed income stream from a highly-rated insurance company can serve to greatly improve the odds that the client will not outlive their resources in retirement.
Our firm has a responsibility to help our clients maintain their lifestyle after they stop working. Given that our clients are routinely living into their 80s and 90s, we need to be diligent about building a portfolio that can withstand the erosion caused by 30-40 years of inflation. We also need to attempt to insulate the portfolio from the impact of cataclysmic market drops as occurred twice in the most recent decade.
So, annuities may serve a valuable role in a retirement portfolio.
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