BUZ LIVINGSTON: Annuities, burgers and Eden State Park
One glorious day last spring, Byron Chism treated us to grilled hamburgers at Eden State Park. The dynamic bluegrass duo Larkin Poe also made the guest list and sang angelically warming up for their evening show at the Seaside Rep. A couple of dolphins even played tricks in Tucker Bayou. You wouldn’t eat a burger every day (although I have) but Byron’s burgers made a perfect accompaniment on an impeccable day.
It took me a long time to figure out for some situations an annuity is spot-on, too.
Every case is different. Deferred annuities deservedly get a load of bad press and this correspondent included has spoken ill of deferred annuities. For income investors, fixed immediate annuities, on the other hand, should not be ignored. With a fixed immediate annuity you (and/or your spouse) turn over a lump sum to an insurance company in exchange for an income stream as long as you live.
Football has Bear Bryant and the retirement planning field counters with Harold Evensky. In addition to his Coral Gables wealth management firm, Evensky teaches personal financial planning at Texas Tech University and boldly calls immediate annuities “the most important vehicle over the next decade.” He believes the products are more efficient now with lower costs. When interest rates rise, he anticipates adding annuities to client portfolios. Previously, mentioning annuities meant scrubbing his mouth with soap.
A 2010 Journal for Financial Planning study (Lemoine, Cordell and Gustafson) found a portfolio of stocks and bonds supplemented with immediate annuities bought sequentially as you get older out-performed a portfolio without immediate annuities. Last summer the General Accounting Office recommended retirees without pensions use a portion of their savings to purchase an immediate annuity. Harvard and M.I.T.’s Zvi Bodie, Ph.D, has long recommended incorporating immediate annuities for retirement portfolios. Roger Gibson, the asset allocation guru, agrees.
An ideal annuity client would be in good health, have a family history of longevity, be over age 70 and have little inclination or desire to pass assets to heirs. “Stock market averse” investors will find an immediate annuity suitable since there is no market risk. Immediate annuities work best for single clients since the payments are higher with no survivor benefit. Retirees without a pension will benefit more from annuitizing a portion of their savings.
To illustrate, a $100,000 purchase for a 70-year-old female would generate monthly payments from $627-$718 ($7,524 and $8,616 annually) depending on any survivor option chosen. AA bonds and CDs can’t touch that income stream.
Many insurance salespeople shy away from immediate annuities because variable annuities or equity-indexed annuities have higher commissions. Annuities don’t fit the typical asset manager’s business model since an annuity purchase means less billable asset management fees. The truth is there are good annuities along with bad ones and Ecclesiastes reminds us everything has an appropriate time.
We find clients reluctant to give up control of their money by buying an annuity but as a professional the discussion is essential. Like Evensky, I once thought annuities totally inappropriate but when I’m wrong I change my mind.
Buz Livingston is a certified financial planner. He operates Livingston Financial Planning Inc. focusing on hourly financial planning and investment management. Contact him directly at 850-267-1068 or at buz@LivingstonFinancial.net.
