Treece Talk Blog

When it comes to annuities, opinions are divided. But is it time to reconsider?

The SECURE Act: A Game-Changer

The Setting Every Community Up for Retirement Enhancement (SECURE) Act, passed in 2019, revolutionized retirement plans. For the first time, defined contribution plans like 401(k)s could offer annuities, increasing access to guaranteed lifetime income options.

Benefits of Annuities in 401(k)s

"Annuities can be a great investment for predictable income in retirement," says Financial Advisor David Treece. They offer:

• Guaranteed lifetime income

• Death benefits

• Downside protection

• Portability

• Steady income streams

Addressing Concerns

While concerns remain, the SECURE Act's "safe harbor" provisions protect plan sponsors. Annuity providers are innovating, making products more user-friendly and flexible.

Missing The Mark: Suze Orman

Suze Orman's writings on annuities are misleading and, in David Treece's opinion, dishonest. She claims annuities are only beneficial for tax deferral, which is false. The main draw is the guarantee from an insurance company, typically a guaranteed lifetime income.

Orman says, “… even though there are exceptions, holding an annuity within a retirement account is one concept that I have never agreed with.” 

She goes on to say, “In other words, an annuity offers you the same tax-deferring benefits as a retirement account does. So you tell me. What sense does it make to hold a tax-shelter vehicle like an annuity in an already tax-sheltered account like a retirement plan? Very little sense.”

The Truth About Annuities

Annuities are insurance products that pay commissions to financial advisors, just like car or homeowner's insurance. This doesn't mean you should never buy an annuity. The federal government has given tax breaks for using annuities to postpone required minimum distributions from IRAs.

Let's Get Real: The "A-Bomb" of Investments

Sometimes when David Treece talks to clients about annuities “It’s like the A-bomb. People are hearing negative things and they are often false. I want you to learn about these. They can be a little bit more involved because you've got a variety of different annuities.” 

Annuities provide guaranteed lifetime income, making them an attractive option for those seeking predictable income in retirement. Don't let misconceptions hold you back.

The Limitations of a 60/40 Portfolio

A typical 60/40 investment portfolio might not provide enough income during retirement, particularly during market declines. The Barclays Aggregate Index (AGG) dropped by 13.02% in 2022. This highlights the risks of relying solely on market investments for retirement income. In contrast, variable annuities offer guaranteed growth and income, providing a more reliable source of retirement income.

Tailoring Annuities to Client Needs

Rethink65's approach emphasizes the importance of tailoring annuities to individual client needs. By picking the right kind of annuity, clients can make a money plan that fits their needs. They can choose between deferred or immediate annuities.

Annuities: Savior or Devil?

Annuities are not the devil, but rather a potential savior for retirement portfolios. Clients want predictable income and guarantees, especially during market downturns. 

With inflation rising, the traditional safe withdrawal rate of 4% may no longer be sufficient, increasing the risk of running out of money in retirement. The 4% rule advises retirees to withdraw 4% of their retirement savings in the first year, then continue withdrawing the same inflation-adjusted amount annually. With high inflation, this approach results in increased withdrawals to account for rising costs. Annuities offer a solution by providing guaranteed income and growth.

Managing Risk in Retirement Income Plans

Retirement income plans face three major categories of risk: market volatility, longevity, and spending shocks. Two approaches exist:

• Investment-oriented focus: Managing risks by spending less in retirement, assuming poor market returns, and overstating the willingness of retirees to stay the course with volatile investments.

• Incorporating insurance products: Pooling risks to manage market volatility, longevity, and spending shocks, allowing clients to spend as though they'll experience average returns.

A Blended Approach

Combining lifetime income protections with investments can lay a strong foundation for retirement success without sacrificing long-term asset growth. Lifetime income protections can:

• Manage market volatility and investment risks

• Protect against longevity risk

• Efficiently earmark assets for retirement spending

• Reduce fear and worry about outliving assets

• Simplify the financial plan

Case Study: Variable Annuities with Guaranteed Lifetime Withdrawal Benefits

Wade Pfau's case study, Using Variable Annuities with Guaranteed Lifetime Withdrawal Benefits in a Retirement Portfolio, found that repositioning 40% of a portfolio to a variable annuity with an income rider significantly increased the probability of achieving the income goal.

Variable Annuity Fees

Concerns about costs are valid, but costs can be viewed in terms of the value they provide as a risk mitigation tool. Variable annuities with income protections can support better outcomes through risk pooling, reducing the overall costs of the plan.

Deferred Variable Annuities with Guaranteed Lifetime Withdrawal Benefit Riders

These items offer a blend of:

• Assured income flow with protection against losses

• Possibility for profit growth via underlying subaccount investments

• Potential liquidity for underlying assets

• Tax deferral

The Verdict

When it comes to variable annuities with guaranteed lifetime withdrawal benefits, costs can be justified by the value they provide as a risk mitigation tool. Current variable annuities with income protections could be an option for clients and their retirement goals.

Take Action on the Right Annuity For You

Explore your options:

• Fixed annuities for predictable returns

• Indexed annuities for lower fees and market participation

• Long-term care insurance for peace of mind

• Delaying RMDs to prolong taxes

• Pension substitutes for guaranteed income

Do you need advice on determining which annuity is best for you?

Schedule a complimentary consultation with Team Treece. We’re here to help.

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Related Resources

Annuities: The "A-Bomb" of Investments

Longevity: An Underestimated Factor in Retirement Planning

The Long-Term Care Conundrum: A Comprehensive Guide to Your Options

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This blog is designed to provide accurate and authoritative information on the subjects covered. It is not, however, intended to provide specific legal, tax, or other professional advice. For specific professional assistance, the services of an appropriate professional should be sought. 

Index annuities are insurance contracts that, depending on the contract, may offer a guaranteed annual interest rate and some participation growth, if any, of a stock market index. Such contracts have substantial variation in terms, costs of guarantees and features and may cap participation or returns in significant ways. Any guarantees offered are backed by the financial strength of the insurance company, not an outside entity. Investors are cautioned to carefully review an index annuity for its features, costs, risks and how the variables are calculated. 

The guarantee of the annuity is backed by the claims-paying ability of the issuing insurance company. 

Variable Annuities: There is a surrender charge imposed generally during the first 5 to 7 years that you own the contract. Withdrawals prior to age 59½ may result in a 10% IRS tax penalty, in addition to any ordinary income tax. The guarantee of the annuity is backed by the financial strength of the underlying insurance company. Investment sub-account values will fluctuate with changes in market conditions. An investment in a variable annuity involves investment risk, including possible loss of principal. Variable annuities are designed for long-term investing. The contract, when redeemed, may be worth more or less than the total amount invested. Variable annuities are subject to insurance-related charges including mortality and expense charges, administrative fees, and the expenses associated with the underlying subaccounts. Investors should consider the investment objectives, risks, charges, and expenses of the variable annuity carefully before investing. The prospectus contains this and other information about the variable annuity.

Contact David Treece at (305) 751-8855 or 10800 Biscayne Blvd., Suite 725, Miami, FL 33161 to obtain a prospectus, which should be read carefully before investing or sending money. 

All investing involves risk, including the possible loss of principal. There is no assurance that any investment strategy will be successful.