Does an Annuity Work for Your Retirement Plan?

Welcome to the Annuity.org Podcast, your path to financial freedom through better understanding annuities, selling structured settlements, personal finance and retirement planning. I’m Terry Turner. In this episode, we’re again talking with Rob Williams. He’s a certified financial planner and holds retirement income certified professional and certified private wealth advisor designations. Mr. Williams is also the managing director of financial planning, retirement income and wealth management at the Schwab Center for Financial Research. Today, we’ll be talking about financial goals and situations that may make an annuity an attractive addition to your retirement plans. Thanks for joining us, Mr. Williams.

Thank you.

Annuities sometimes receive criticism for their fees and how complex they are. Could you shed some light on how fees associated with annuities work and whether they outweigh any of the potential benefits of including annuities in your retirement plan?

Yeah. I mean, again, annuities, there’s lots of different types. And that is definitely a common statement and concern, and there’s some merit to it. Certain types of annuities do come with high commissions, that the person who sells them is paid a fairly high commission. They could have underlying fees, et cetera. There are other types of annuities like, for example, a single premium immediate annuity, which is an annuity you buy at retirement. It’s a little bit like buying a pension. It’s fairly straightforward and generates a paycheck for you. You turn over a lump sum and there generally is no fee associated with that. So I think it overgeneralizes to say that annuities are fraught with high fees. It really depends on the type.

But yeah, be aware if there are: Is it worth it? That’s really what we suggest. Have a plan. Talk with someone who’s an impartial expert that understands all the tools. A financial planner generally can do that. Weigh the cost benefits for what you’re getting in each of those tools.

Well, retirement plans should ideally be tailored to an individual’s unique situation. How can someone determine whether an annuity is suitable for their specific retirement goals and for their financial circumstances?

Yeah, and I’m going to shift a bit to talking about an annuity for income in retirement. That’s once you’ve gotten to that point and you’re saying, “Well, I want to have an annuity to generate a paycheck, to generate income, to generate money when you need it.” And generally, if you’re in good health, many annuities depend on how long you’re going to live. And if you are concerned about managing money and markets and volatility in the markets on your own, you don’t have a pension, those are all good indicators to us that you might want to consider adding a bit more what we call guaranteed income, almost like a floor.

Most of us have social security, and that’s a form of guaranteed income. It’s guaranteed by the U.S. government. That’s a floor of income. Certainly, that’s great to have. It’s a valuable floor of income. And then you can add to that annuity income, again, if you meet those criteria. You’re in reasonably good health. You don’t want to manage the risk of your portfolio on your own.

The other is if you’re what we call you’re not overfunded. You’re not someone who saves so much that they’re thinking about creating an endowment fund for their kids. You want to make sure every dollar lasts. So buying that annuity to generate guaranteed income can be very efficient. It’s a form of insurance. So if you live longer than average, you’re going to benefit. But not alone; In combination with the portfolio.

So it’s, again, not a if/then. It’s more of a yes/and. And that and, yes, an annuity makes sense as part of my plan. Again, those indicators may be ones that are a cue that you might want to talk to someone about adding one to your plan.

Well, since our listeners are relatively new to retirement planning, could you recommend some reliable resources or some strategies for them to further educate themselves about annuities and other retirement options in addition to, obviously, talking with a professional financial advisor?

Yeah. I think the first is, again, we always believe that at Schwab, where I work and we provide thought leadership, that more education is better, so being informed. There are many solutions and products that may be purchased that aren’t understood well, and I know it’s difficult with annuities. That’s why your podcast is great, and helping people to be educated is really important. And so starting with that education first, but then knowing that if you’re being sold anything, you want to get the whole picture.

So talking with someone who is a comprehensive financial planner who can look at all the options together, that’s increasingly available to more and more investors today. Either through your employer or through a firm like Schwab, you can get a plan, because it’s really how all the pieces and parts work together, not one or the other. That can sound complicated, but the good news is there’s help. And I think the third is probably—Just the final one is never sign any paperwork for any product or solution until you really feel certain that you understand all the details, the fees, et cetera, and do whatever you need to make sure you ask the right questions and understand that before you move forward. Those are three steps, I think, just about anyone can take to make sound decisions.

Good advice. If there’s one key takeaway, Rob, that you’d like our listeners to remember about annuities and their role in retirement planning, what is it?

Annuities are a tool just like stocks are a tool, cash bonds are a tool. Social security is a form of tool. And all those tools work together. So I would say annuities, sometimes say they’re good, they’re bad, they’re too expensive. Well, perhaps not. They’re a useful tool. They provide a form of insurance, especially for income and retirement, and that tool can go in a toolkit. It can be a combination with your 401(k), with your IRA, with social security, with stocks, bonds, cash, things that you invest in those other solutions.

So again, just remember that: What are you trying to achieve? Well, I want some assurance. I want to know my money’s going to last. I want to also have some access to cash when I need it if there’s an emergency. I want growth. I want to keep up with inflation. Well, no one tool will do all those things well. Putting the pieces together, the answer is usually yes/ands, not either/or. And that’s really what having a retirement income plan is all about.

Rob, thanks for joining us.

Thank you.

Rob Williams, the managing director of financial planning, retirement income and wealth management at the Schwab Center for Financial Research. And thank you for joining us on this episode of the Annuity.org podcast. For more information about annuities, personal finance, anything else we talk about here, check out Annuity.org, your path to financial freedom. You can subscribe to the annuity.org podcast for free, available wherever fine podcasts are found. Our theme music, Feelin’ Good, was produced by White Hot, available at freebeats.io. I’m Terry Turner for Annuity.org.