Things to Remember During Uncertain Times Blog

Your Three-Legged Stool: Understanding Annuities

When thinking about retirement, it can help to envision a three-legged stool. Everybody knows a two-legged stool isn’t dependable because you have no stability. If you sit or stand on a stool with only two legs, you’re going to end up in the floor or on the ground. For a stool to be stable and reliable, it must have at least three legs. The same is true for retirement.

Your Three-Legged Stool

Many people feel uncertain about retirement because they depend on social security and personal savings for retirement income. These are two legs of your retirement stool and they’re critical. However, without that third leg, your stool isn’t stable and will eventually topple over. You need the third leg to create stability. When building your retirement stool, you need an investment platform that replaces an employer-sponsored pension.


Fortunes have been made by owning the right stock investments. Conversely, fortunes have also been lost by owning the wrong stocks. If stock investments were predictable, my job and your retirement would be a whole lot easier. Unfortunately, the risk of loss is a huge obstacle in retirement.

Look at IBM. A great company whose stock was around $214 in March of 2013. By February of 2016, their stock had fallen to $118. This example shows how varying economic environments and constant innovations impact the price of stock. Results are unpredictable and can vary significantly.

Pension Replacement

That brings me back to the pension piece of your three-legged stool. A predictable cash-flow that can’t be outlived made the difference in our parents’ retirement income. If you don’t have a company-sponsored pension, you need to create the same type of guaranteed cash flow during your retirement.

Annuity Roundup

At a minimum, building your three-legged stool requires social security, a pension or pension-type investment, and personal investments. If you don’t have a pension and need to stabilize your cash flow then, an annuity is one of the best games in town.

For many people, “annuity” is a word that may evoke an emotional response. Depending on what you read or who you listen to, you might think an annuity is a rip-off. You may even be a card-carrying member of the “Anti-Annuity Coalition.”  If this describes you, I strongly encourage you to understand what an annuity is, and what it is not.

Annuity Defined

An annuity is a contract between you and an insurance company. One potential benefit is that an annuity can provide guaranteed income for your entire life.  Just remember the devil is always in the details. “Annuity” is just a word. What an annuity does are the benefits. Because you need to understand differences, a very brief discussion of the differences is important.

Variable Annuity

Your money is invested in “mutual fund like” investment choices. The value of your actual investments fluctuate based on those investments. While expensive to own, you may elect to add a guaranteed income rider to the contract.

Immediate Annuity

You buy a pension. Depending on how you set the contract up, you can have income for your life or both your life and your spouse’s life. You can also determine the number of years an immediate annuity provides income even if you and your spouse were to pass away early. Again, the details are especially important. The trade-off with an immediate annuity is that you lose future access to those funds.

Fixed Index Annuity

A popular choice, you get crediting of interest based on the return of a stock or bond index.  Your investment does not go down if that index were to decline, and you can get an income for life, just like a Variable and Immediate Annuity. Also, if you pass away with money remaining from your investment, it passes to your loved ones via a beneficiary designation. This piece works like your IRA or 401K would, provided it’s properly designed.

Your Income Plan

As you can see, an annuity can be an important part of a well-structured income plan and provide the final leg when building your three-legged stool.  What it should not be, however, is the only choice in your plan.

Components of a well-structured plan include things like liquidity- annuities. Yes, you can get to some of the variable or fixed index annuity values, but if you do, you may alter how your income guarantees perform. So, you need to have money in your overall plan that is accessible without any strings attached. Next, you need growth. If you are going to grow the portion of your investment portfolio that you may need in the next 10 years or so, you need to be able to make investment decisions that allow you to be in the best place at the right time. A well-built tactical investment portfolio designed for growth of value should be a part of that account.

Money you don’t need during the next 3-5 years, can go through an investment cycle. If you use tactical investment strategies, rather than follow a buy and hold approach, you increase your probability of success.

This long-winded answer is that choosing an annuity MAY be a desirable choice for part of your retirement plan.  It could be a good and stable leg for building your three-legged stool.

How will you know if an annuity is right for you? Work with an experienced trained professional who will take the time to collaborate with you, answer all your questions, bring up issues you may not even know to ask, and then craft a plan that will best meet your needs.

**Variable annuities are subject to market risk. Investment return and principal value will vary so that units, when redeemed, may be worth more or less than their original cost. Also, withdrawal of earnings will be subject to ordinary income tax and may be subject to 10% IRS penalty tax if taken prior to age 59 ½ . The death benefit guarantee is subject to the claims-paying ability of the issuing insurance company and does not apply to the investment performance or safety of the underlying investment options. Variable annuities are suitable for long-term investing, particularly retirement savings

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