Scott Witt
Scott Witt, president of Witt Actuarial Services, a fee-only consultant that analyzes life insurance policies and annuities for financial planners and affluent individuals, New Berlin, Wisconsin. WittActuarialServices.com
Annuities can provide steady, reliable income during retirement, but in today’s high-inflation environment, it may not make sense to annuitize your money. What you should know…
Two kinds of annuities. When people talk about “taking out an annuity,” they often gloss over the fact that there are two main categories of annuity…
Income annuities. An income annuity means that you are handing a sum over to an insurer so you can typically begin drawing on it immediately. During the accumulation phase, many people rightly think of annuities as investments, but once you get to the income (or distribution) phase, your annuity is more like an insurance vehicle against living too long. Inflation problem: During a time of high inflation, asking an insurance company to annuitize a big chunk of money is doing yourself a disfavor. This year, we’ve experienced inflation on the order of 9%. If that were to persist for five years, the purchasing power of your annuity payment would be just 62 cents on the dollar in the fifth year. That’s an extreme scenario, but after 20 years of much milder compounded inflation of 3%, your dollar would be worth only 54 cents. And because of low demand thanks to years of low inflation, most insurance companies don’t even have inflation-adjusted annuities in their product suites.
Accumulation annuities. An accumulation annuity means that you’re in the wealth-building phase, adding money over the years to be taken out at some point in the future. If you’re contributing to an accumulation annuity, there’s no reason to change that. The inflation picture may be better when it is time to convert your policy to an income annuity…or you can make a different choice.
But: When it comes to taking out a new accumulation annuity, there may be smarter choices. If you have a 401(k) with an employer match, do that. If you’re concerned about your post-retirement tax bracket, you might want to look at an additional tax-qualified savings plan such as a Roth IRA. After you’ve exhausted those other options, it’s time to ask whether it makes sense to consider annuities.
Shop around. Try an online tool such as “Annuity ROR” at IQCalculators.com to check your implied rate of return given different lifespan scenarios. If you think an annuity makes sense, retain an adviser to help you consider how inflation affects your decision process.
