Choosing an income annuity

Learn how to work through the decision-making process.

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Stephen Weber: A lot of people like to play this game, which will I die with more money with, if I annuitize or if I invest it myself? And that’s probably the wrong game to play when we’re talking about something like an income annuity. There are different questions to that, different answers to that, and it’s going to depend on markets and a whole bunch of other different things. But the point of an income annuity is not to die with the most money. It’s to give yourself a stream of income that’s guaranteed to last for life.

Danielle Corey: Steve did touch on an important topic within the answer to that question and this idea of liquidity and access. So folks who are considering an income annuity, it is a tradeoff that you’re giving up the liquidity and the access for that guaranteed stream of income. So it’s really important that they’re comfortable with the remainder of their retirement savings and that that provides them with adequate liquidity in case of emergency and to give them discretionary spending.

Akweli Parker: Excellent point.

Stephen Weber: And to build on that just a little bit more, right, we always think of that as sort of a risk, if you will, of buying an income annuity, right, that you’re going to lose access to your portfolio. But I think it is possible to almost flip that on its head and think about the opportunity that is associated with losing access to that money. And it’s going to sound, what are you talking about, Steve? That sounds weird. But the idea there being that you’ve already given that up. It’s going to come in as an income stream, and whatever happens down the road… so people are afraid to spend from their portfolios during retirement. It’s really hard to spend from your portfolio during retirement. You’ve built this thing up, you’ve been a saver your whole life. Every time that you want to take money out, it hurts for a lot of people, because it’s the opposite of what they’re taught themselves to do their whole life.

Akweli Parker: Right, that’s how they built that up.

Stephen Weber: So as a pre-commitment device, you could take a significant piece and say, “This is money I saved so I would have income. This is money that is there to provide income. I’m going to make this decision once. I’m not going to have the ability to not make that decision again in the future. Right, I’m going to give up control of that essentially by pre-committing to giving that up.” And now what’s the rest of my portfolio? The rest of my portfolio doesn’t have to meet that basic income amount, and I can start thinking about what I want to spend on, rather than what I need to spend on. And that changes a little bit the dynamic of what I might need to spend.

So to some extent, of course, everybody wants to have access to their money. It feels hard in the same way, right. Not that many people buy income annuities. One of the reasons people don’t buy income annuities is it’s hard to part with the money that buys that income stream. But there is a flip side to that which is that you’re not bound by the constant decision-making to withdraw small amounts to meet basic needs.

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