3 Ways to Use an Annuity

3 3 Ways to Use an Annuity Header ImageYou may have heard of annuities for retirement income, but they can serve other financial planning goals as well. Read on for client stories and solutions involving annuities that may be a little unexpected.

You might be surprised at how flexible annuities can be!

  1. Think about annuities as an alternative to life insurance

 One couple we know, Chris and Renee, retired a few years ago. Chris was the primary breadwinner in their household and had an ample life insurance policy in place to protect Renee. They don’t have children and their primary concern for retirement was maintaining a comfortable but sustainable lifestyle.

Chris’ insurance policy was getting less rational (and more expensive) by the year. How to protect Renee without all that out of pocket expense?

As an alternative, the couple’s Vitucci advisor looked into an annuity with a survivor rider, which would provide monthly income today and ensure that the income would continue throughout both of their lives.

This was a serious decision for all the usual reasons but also because of Chris and Renee’s asset base and lifestyle needs. With much of their wealth in their home, purchasing an annuity that provided the income and lifestyle they wanted would require downsizing and using some retirement savings.

After reflecting on the options, Chris and Renee decided to go for it and moved into a condo better-suited to Chris’s declining mobility – but they didn’t move to a cheaper location. Instead, they decided to move closer to the city center, where they could enjoy easier access to concerts and restaurants.

For Chris and Renee, this was a suitable and logical decision – but that doesn’t mean it’s the right choice for everyone. Because of their specific lifestyle and spending patterns, it’s a solution that works for them, especially because they still have ample savings to cover emergencies and other costs.

It’s also saved a lot of stress for Chris, who was constantly worried about Renee’s future.

Renee said, “Now we know that we’ll always have a place to live, and we’ll always have income. It was tough to make these big decisions and go through the process of moving, but it’s been worth it – I can see that Chris is finally able to enjoy retirement.”

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  1. Consider a deferred annuity to manage longevity risk

Did you know that for couples aged 65, there’s a 25% chance that one of you will reach 98 years of age? On average, men have a 25% chance of living to age 93 and women to age 96.

One of our clients, Tanya, was blown away by this statistic.

Even though she’d done everything right when it came to retirement planning – always prioritizing savings, meeting regularly with her advisor, and being realistic about her son’s college tuition – she wasn’t confident that she’d be able to stretch her savings for quite that long.

“What if I lived to 100?” She told us, “I was scared about whether I’d be able to enjoy my retirement knowing that there’s a chance I’d run out of money before I run out of gas.”

To help balance this risk with Tanya’s need for current income and a savings buffer, we explored the idea of a deferred annuity. For an upfront payment today, a deferred annuity kicks in at a certain point down the road to provide monthly income for the rest of the annuitant’s life.

Tanya wasn’t concerned about leaving significant assets to her son or about the risk of never using her benefit. She said, “My main concern is being a burden to my son and spending my whole retirement worrying about whether I’m spending money that shouldn’t.”

We found an annuity that balanced the costs and benefits for Tanya. It will kick in when she turns 80 and provide monthly lifetime income from then on. Based on Tanya’s savings and investment plan, this will give us a bit of a buffer, as we expect her savings to last until she’s about 85 or 86.

Deferred annuities can be a helpful way to manage longevity risk because they kick in later in life and are usually cheaper than annuities that start paying today.

But they do have costs. The main risk is in buying an annuity that you won’t end up using should you pass away before it starts. Unless you purchase a specific rider, the funds won’t be available to your survivors in this situation. There’s also the risk that the insurance company you buy it from won’t be able to pay: be sure to do your research and choose your insurer carefully to help reduce this risk.

  1. Think about an annuity to simplify inheritance3 3 Ways to Use an Annuity Info Image

 For those who do want to leave money to their heirs, annuities can be a useful way of doing so. Gordon and Jenny, for example, met later in life when their children were already grown, and one of their key planning issues was to combine their finances for a lifetime together while also providing an inheritance for each child.

However, it was a situation complicated by personality and emotion.

Among the five children, there were various levels of competency with money and some grumbling about what a “fair” distribution of assets would look like.

Gordon and Jenny wanted to bring their full separate resources to bear for the other, but they knew that there could be conflict among the children about inheritance.

This obviously caused distress for the otherwise happy couple, and so they decided to find a more creative way of helping their children and meeting their own goals.

To accomplish this, Gordon and Jenny’s Vitucci advisor suggested a different way to use annuities.

  • First, Gordon and Jenny organized their financial assets into two piles: one was a savings stockpile for both to access should the need arise, and the other was used to purchase two lifetime annuities, one for Gordon and one for Jenny.
  • Each annuity carries death benefits for the annuitant’s children. In other words, upon Jenny’s death, her annuity would pay out an equal death benefit to each of her kids, and Gordon’s income would then be supplemented by their savings. The same would happen upon Gordon’s death.
  • At the end of both of their lives, any unused assets, including the home they shared, would be split equally across all surviving children, with their estate attorney helping to facilitate this process.

This helped the couple to reassure all of their children that they would be “remembered” as inheritors while also helping to protect their financial flexibility. “We wanted to be able to make decisions without causing an uproar – if I die and Gordon wants to sell our home, I want him to be able to do it without any blowback from my kids,” said Jenny.

Gordon put it this way: “Could there have been a simpler way to provide an inheritance? Probably, but family dynamics made this the best solution for us.”

Your own needs

In family scenarios like these, annuities can provide a sense of certainty and clarity that other financial planning tools can’t give. However, annuities can get complicated, they aren’t always the best solution for a particular situation, and they can be costlier than other forms of planning.

Be sure to reflect on your specific situation and needs before making any decisions, and consider speaking to a qualified advisor who can help you explore all the options.

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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

& 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.

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.
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