Don’t Forget This When Considering an Annuity

As you build your retirement income plan, you might have felt the tug between two competing interests: stable and predictable income versus holding on to your assets (or trying to invest them to make more money).

Fixed annuities in particular tend to bring out this internal conflict. For example, we had a client, Edward, who identified retirement income security as his most pressing retirement concern. But when we talked about the possibility of a fixed annuity for his situation, he balked at the idea of relinquishing his savings to buy it.

His questions were common ones: “What if I die in 5 years? What if I want to leave money to my kids?”

While it might not seem like it from the outside, this is an absolutely normal response. When considering any financial decision, it’s all a matter of perspective – and there’s nothing like writing a big check to bring your perspective into sharp relief.

That’s why it’s important to remember what you’re buying when you choose an annuity (or any other insurance or investment product), and to frame the decision accordingly.

Here’s how.

Don’t forget: Your framing affects your feelings

Fixed annuity products are designed to provide a guaranteed amount of income for a certain amount of time – life, a set number of years, two lifetimes, etc. – in exchange for a lump sum payment today. While there are many different flavors of fixed annuities, with different features and requirements, they tend to share this common foundation.

But how you think about that trade-off can have an enormous influence on the choice you eventually make.

One study illustrated it well. An online survey asked 50+ year olds to rate the attractiveness of an annuity, which was presented in one of two ways:

  • The “consumption” frame described the annuity as offering the person $650 in monthly spending for life.
  • The “investment” frame said the annuity would provide $650 in guaranteed monthly returns.

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Survey-takers were decidedly affected by the difference: while 70% of people chose the annuity in the consumption frame, only 21% did when presented with the investment frame.

How does this affect your financial planning?

When you talk about “purchasing” an annuity, you could be influencing the way you weigh the decision.

After all, when you buy something you want to get value from it! And exchanging a lump sum of hard-won savings for a much smaller monthly check might instinctively feel like a bad deal.

But it’s important to understand what you’re purchasing – and why.

If you’re considering annuities because you’re concerned about outliving your assets, or market risk, or just the day-to-day complexity of in

vestment management, you’re “buying” something more than monthly income.

In this case, it’s useful to take a step back and assess your actual goals and preferences.

Ask yourself questions like:

  • What is my top financial priority for retirement?
  • What are my biggest retirement risks?
  • What part of retirement income planning is keeping me up at night?

Understanding these types of questions can help put you in the frame of resolving them – so that you’re assessing possible financial solutions using an appropriate framework.

Of course, that might lead you to a fixed annuity as a possible solution, or it might not.

Fixed annuities – or any financial product for that matter – are not the answer for everyone. Be sure to carefully assess the costs and benefits of any financial product in the context of your financial picture before making a decision, or speak to a qualified advisor who can help you find appropriate solutions for your situation.

Are you overwhelmed with retirement plans?

In addition to retirement income, you’re probably considering a number of other issues, including health coverage. With all the Medicare options out there, this can become a confusing undertaking – even for sophisticated insurance shoppers.

Download our free Medicare guide to get started. We’ll cover common plans, questions, and risks and help you navigate the process so you can get started on enjoying the retirement you want.

Click here to download Medicare Basics today! 


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Let Us Help!

We can discuss this topic and more at a complimentary appointment. As a bay area retirement planning coaches, we can give you a review and make suggestions based on your retirement objectives.

Important Disclosures

Vitucci & Associates Insurance Services or United Planners Financial Services (United Planners). The opinions voiced in this article are for general information only. They are not intended to provide specific advice or recommendations for any individual and do not constitute an endorsement by United Planners.

To determine which investments may be appropriate for you, consult with your financial professional. Please remember that investment decisions should be based on an individual’s goals, time horizon, and tolerance for risk. Neither diversification nor asset allocation can ensure a profit or prevention of loss in times of declining values. United Planners does not render tax advice.

Guarantees are subject to the claims-paying ability of the insurance company. Withdrawals of earnings are subject to ordinary income tax and prior to age 59½ may be subject to a 10% federal tax penalty. Unlike CDs, annuities are not FDIC insured.

Securities and advisory services offered through United Planners Financial Services, member FINRA, SIPC. Pasquale Vitucci, CA Insurance Lic. # 0758212, is an Endorsed Agent of Vitucci & Associates Insurance Services CA Insurance Lic. # 0I06319. Vitucci & Associates Insurance Services and United Planners are separate and unrelated companies.

This page contains links to third-party company websites. By selecting a link, you will be leaving our website and launching a new browser window. These links are provided for informational purposes only and should not be viewed as an endorsement, sponsorship, solicitation or other affiliation with respect to any third parties. We are not making any recommendations or providing any advice on securities in particular or investments in general. Neither Vitucci & Associates nor United Planners Financial Services have reviewed the content of, and are not responsible for, the information or the results of the third-party websites.

Further Reading

Annuity survey: