James Philpot: Annuities and Your Retirement Portfolio

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, and joining me on this episode is Dr. James Philpot, director of the Financial Planning Program and associate professor in the finance and risk management department at Missouri State University in Springfield, Missouri. Thanks for joining us, Dr. Philpot.

Well, it’s my pleasure.

For people who have an annuity right now and are worried that it won’t be worth as much as they thought, it’s not going to have the buying power they expected due to inflation, what should they consider in the long run right now?

That’s one of the problems with an annuity, especially a fixed annuity. If we are in, we have a fixed payment, we have greater than expected inflation, we lose some buying power, and we’re pretty much stuck with that. The hope is that we won’t see more and there won’t be more damage done. The immediate response is nothing magic or sexy. Let’s review our spending habits, let’s review our spending priorities, our budgeting priorities and make the adjustments.

The other approach would be on the income side. Maybe we have other investments in retirement. Maybe we have, say, IRA assets that we did not transfer into an annuity, that we didn’t annuitize or 401k. We still have control over those assets, and we might — if again, we are understanding of the risks, understanding of what we’re doing and our risk tolerance would dictate — we might put those into a little bit more aggressive investments. Again, perhaps a mix of higher-yielding fixed-income securities or some kind of income-producing equities that may grow.

You know, when we have periods of inflation or recession or any other kind of upheaval, there is an urge for a lot of people to change their investment plans suddenly. What kind of advice do you have to give to people in these times?

I always tell people to take a rather deliberate approach. There’s nothing magic about waiting any specific amount of time, but one of the things that’s very important in any kind of investment decision — particularly any kind of decision that is responding, say, to a change in a market condition — is the personal review. What is my goal financially, overall? If this investment is part of a bigger portfolio, what is my goal for this investment? What are the goals for other parts of my portfolio? What are they doing and how has any of that changed? And how has the changes in the markets, the economy, the characteristics now, of income being produced by those investments? How has that changed?

The process of giving that very good consideration is going to contribute to a good deliberate type decision rather than a knee-jerk decision. So really when I talk to people, I don’t talk about, “Oh, sit tight for a month and then make a decision.” I’m encouraging, usually, an introspective process as well as an evaluation of the portfolio. Well, that takes a little time. If it’s done properly. And by the time that’s done, then something can be done and it’s a nice deliberate decision. I’m very much in agreement with any of the financial advisors who say: “Don’t do something rash.”

In that personal review, what questions should people ask about annuities if that’s something they’re considering adding to their portfolio? What are the important questions to ask right now?

One of the questions in any situation on adding, say, an annuity or annuitizing part of your retirement savings, the obvious question: “How much of my income am I looking to replace annually?” And how much of that do I really want to replace with some sort of guaranteed payment? It may not be all of that. It may be all of that. It may not be. And what goes into that decision? One, how much of a portfolio do I have? How much risk am I willing to take, and what kind of risks? Am I willing to bear inflation risk? How much inflation risk am I willing to bear?

And if I’m not willing to bear much, then I’m not going to annuitize my full portfolio. Am I willing to eat into principal, say, of non-annuitized retirement assets? Some people are much more open to that sort of thinking than others. I know perhaps, given your and my age, our parents were very much of the “never touch the principle” type mentality. I don’t necessarily encourage that mentality, but people vary in their willingness to do that, and someone who’s not willing to do that is probably going to be much more comfortable bearing some of the inflation risk and annuitizing. Again, I’m talking about a fixed annuity here, annuitizing a larger amount of their retirement replacement income.

With pensions going by the wayside, annuities, private annuities, kind of filled that void for a lot of American workers.

Right.

A lot of Americans live paycheck to paycheck. So the idea of having that steady stream of income for life really appeals to them. If someone wants that type of security, what do they need to take into consideration when saving or investing for retirement, especially when it comes to periods of uncertainty, inflation, recessions or other unexpected events, like wars or pandemics?

Goodness, about 25, 30 years ago, there was a brilliant book written, perhaps you’ve read it, and it was titled “The Millionaire Next Door.” In it, two business professors surveyed huge numbers of millionaires, people with 1 million or more family net worth, and the occupations and characteristics were very surprising. The number one feature that came up when these authors were studying and saying, “What makes these people go? What’s a common factor?” was they all lived well below their means. See, they had tremendous savings rates. And many of them did not have tremendously high incomes. Many were small business owners. They would have highly variable, but they were always able to save some. Developing an aggressive saving plan is going to be easier for some people than others. It’s going to be easier for some people to implement more quickly than others because we’re talking lifestyle, we’re talking income as well as all of that.

But that’s going to be one of the big things to think about because, for example, let’s say that you have a $50,000 annual income today, and you are a 35-year-old. The 35-year-old in that situation, who is aggressively saving and, let’s say, is saving 10% toward retirement, is effectively learning how to live off of considerably less and is developing a lifestyle expectation based on considerably less than what they’re earning. So that augments the simple fact that they’re saving more toward retirement to kind of get a double boost, if you want to call it that, toward being ahead of the game when the late age, late fifties, roll around, and we’re looking at portfolios.

Dr. Philpot, thank you so much for joining us. You gave us a lot to think about.

Glad to do it. I hope you have a good day.

Dr. James Philpot, associate professor in the finance and risk management department at Missouri State University. 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 Annuity.org Podcasts for free, available wherever fine podcasts are found. Our theme music, “Feeling Good,” was produced by White Hot, available at freebeats.io. I’m Terry Turner for Annuity.org.