Annuities can have a role in a financial plan when the trade-offs make sense for a client’s unique situation. In the right circumstances, an annuity can help provide guaranteed lifetime income, reduce overall portfolio risk, and support a more balanced financial plan.
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John, I see this all the time on LinkedIn or YouTube or articles that I read from financial publications about annuities, and it seems like they’re always getting a bad rap. Do these have a legitimate role in a client’s financial plan?
Well, first off, we don’t use them frequently, and when we do, we use low-cost designs stripped of a lot of the bells and whistles.
Essentially, annuities are the opposite of life insurance. Life insurance is insurance against not living long enough, and annuities are insurance against living too long. You’re trading liquidity and potential growth for guaranteed income and for the rest of you and your spouse’s life.
But anytime you receive a guarantee, you have to accept a lower growth rate. Where we use annuities is when this trade-off makes sense for our client’s unique personality, and they can afford this trade-off, which is to say a lower rate of return permanently. It also helps us reduce overall risk by creating monthly income and thereby allows us to perhaps invest in more equities across their portfolio.
Okay, so in certain circumstances, if there’s a desired outcome or a defined outcome that you’re trying to achieve for a client, these can be a potential tool.
Yes, exactly.