Does it Ever Make Sense to Purchase an Annuity?

Have you ever wondered if purchasing an annuity makes sense for you?
There are two conflicting opinions from financial advisors: some advocate for annuities while others advise against them. James explores the concept of being a fiduciary and the challenges of understanding the financial advisory industry. He covers when annuities may be a suitable option, such as providing guarantees, protecting against longevity, guaranteeing core expenses, and the benefits of Qualified Longevity Annuity Contracts (QLACs) in reducing required minimum distributions.
There is no one-size-fits-all approach to financial planning. Your individual circumstances and goals will determine whether annuities are the right choice. It's always a good idea to seek professional advice and review all your options when making decisions about annuities.
Questions answered:
Is an annuity a suitable financial product for retirement planning?
What factors should you consider when deciding whether to purchase an annuity?
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⏱Timestamps:⏱
0:00 Intro
2:51 What is a fiduciary?
8:43 Explaining annuities
10:53 The wrong way to look at it
13:23 Another way to look at it
17:53 When is there a case for an annuity?
19:49 Another case
22:06 Qualified Longevity Annuity Contract
24:40 Outro
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[@markt4605]

Thanks for putting this post together. I have kicked around the idea of an annuity but like the idea of a smaller guaranteed annuity to handle some expenses and investing a bigger percentage in vehicles that can grow.

[@guzzi95]

I am out of debt.That is the Key place to be, before retiring.. We can live off of your SS and I have two 5 year fixed indexed annuities that have done pretty well for me. You don't loose any of your principal and I am paying no fees. I also have a 5 CD Ladder that mature at different times. I can use that money or buy another one when one matures. About every 2 years I have a CD maturing. What I have now have great interest rates too!

[@kenhansen8186]

Best deal in town was to buy a treasury bond at 5% when interest rates peaked. Guarantees to double your money in 14.4 years. I put 40% of my portfolio into these investments at 4.5% to 5% rates. Laddered income investments gives the flexibility to invest at better rates whatever the future holds for higher rates when future laddered income investments mature. At age 70 works better than annuities. I will also have the principal whenever I want it with the flexibly of selling treasuries.

[@jamesgraham5470]

Just turned 69 and I put half of my money into a 5yr fixed annuity for my income bucket that will create 5.30 pct interest while giving me principle protection I feel much more relaxed letting my growth stocks grow for the next 10yrs

[@khoasterful]

I’ve recently retired at 55 and detailed retirement planning, including annuities. My feedback. 1) buying annuities is like buying insurance, a guaranteed form of payment. James already detailed the upside and downsides (thx James!). 2) Am I putting a good chunk of change into a single entity over a long period of time? What happens if the company goes bankrupt? I can also do that with index funds, with less risk. 3) insurance companies that sell annuities don’t do so unless it is profitable. [non-fiduciary ] brokers don’t offer them unless it is profitable. That’s extra layers of fat… Food for thought. Happy retirement:)

[@vansicklejerry]

Have you looked into social security? I assume you are not disabled. If so, that changes things. I am retired already at 52 and have been for 14 years, but my 50 year old wife can't take her early retirement until she is 55, so she wants to keep working until 55 unless her health gets worse. I'm curious about social security. I'm disabled from the VA, but just found out that I can't get SSDI because I waited to long to apply after I quit working. I'm wondering if my wife's social security will be loss or what the effects will be besides it just not being as high if she retires between ages 50 and 55. We are almost completely debt free and have a nest egg and she could prob quit working now if we continue to live frugally, but we want to leave our kids with our nest egg and not use it, so if and when she can start drawing SS it would give us extra money to travel say once a year or something.

[@billgarcia8460]

I recently purchased an Annuity from my wealth advisor and I'm comfortable with it. Guaranteed life payments, continues for my wife after I'm gone or she can take one time life insurance payment, guarantee minimum 8.25% or market index performances- whichever is greater. I'm ok with the insurance company making some money if there's guarantees [ they had to be A+ rated, obviously the only risk is bankruptcy].

[@leannesampson3199]

Thank you for your excellent, objective and honest advice. It is not just "worth its weight in gold", it is priceless ♡

[@RootFP]

Glad it was helpful!

[@annetteherber6939]

Thank you so much - I listened to it twice. So well presented pointing to the sources of your knowledge, connecting the dots between "fiduciaries," annuities, and the apparent new favorite: fixed index annuities. Really appreciate it, you got yourself a new subscriber.

[@immortalnow]

James, I'm a first time listener and appreciate your clear and simple explanations, much better than most.

[@rogersporre8772]

James has a gift for making a very complex issue completely understandable. I so appreciate this discussion! Somehow I have never been able to accept the maxim of buy term insurance and invest the rest; which is very simple compared to annuity investment. I was advised to invest 25% of my net worth in indexed annuities to cover all expenses. My parents lived into their mid 90’s so I would like to think this will significantly reduce longevity risk. I am still able to sleep despite market volatility and this is clearly my source of peace of mind.

[@anthonyvanburen3998]

Great explanation. Thanks.

[@Steve-ku8wk]

James, this was a great podcast. Thank you. As I am on the cusp of retirement myself, I had been struggling with the question of whether to annuitize part of my portfolio. A major investment firm, where I keep my assets, defaults to an annuity recommendation for guaranteed income as part of their standard online retirement planning center. I came to the conclusion that in my personal situation I was not comfortable going the annuity route, primarily due to the lack of inflation protection. I appreciated the thorough discussion that you did on the podcast which helped provide me with further confidence that I had taken into account some key considerations related to annuitizing.

[@johnmckenzie4593]

always educational and easy to understand. Thanks for offering this useful resource. I use your podcasts and others to help me determine if my plan is properly adjusting and what questions are good to ask my financial advisor.

[@OnCashFlow]

The Book "Die With Zero" got me interested in learning more about annuities. Previously I always thought it was never a good idea, and that it was always a sleezy financial product. Glad that I am at lease expanding my mind and learning more about them and their complexities.

[@RootFP]

Great book

[@tonyton4249]

😅

[@skobuffs5761]

James, another awesome podcast. Thank you.

[@TSinRM]

I don't see buying an annuity as an all or nothing proposition. As part of my retirement planning, I put a portion of my nest egg into an immediate annuity to cover what you term as core expenses. My annuity has a guaranteed period, whereby should I die before my principal was received, my serving spouse would receive the balance. My annuity is for my life, so I'm hoping I receive more than the amount I purchased. I was okay with the opportunity cost, knowing that my basics would be covered in retirement. I still maintained most of my nest egg in an IRA with a financial advisor so that it will hopefully grow and outpace or at least keep up with inflation. We receive part of our retirement funds from the IRA, as we have witnessed the markets have been pretty volatile recently. If all of our income were dependent on the IRA, I might now start feeling some pressure to decrease my IRA withdrawal rate for feel of exceeding the 4% rule. Everyone's financial needs are different, but the annuity has served a good place in our planing thus far.

[@DaystarHiker]

I have Annuity + Social Security as a base income. And a retirement fund to supplement that. The annuity protects against sequence of returns risk. if the market is down, I just won't with draw until it turns up.

[@bobfmirvine6652]

However, our lovely IRS has given us Required Minimum Distributions which must be taken even when the market is down!

[@sonnybanga9006]

An excellent balance of facts guidance - a high information podcast

[@MichaelToub]

Thanks for pointing out the lack of inflation adjustment

[@darwinjina]

Had received plenty of suggestions to surrender an annuity. Well, wife liked the guarantees on an annuity, so it was a no go.

[@walterlimbacher4264]

The fact that they are trying to “ sell” you something is telling

[@M22Research]

Excellent annuity discussion, at least after 8+ minutes of non-annuity discussion. We are using a layered approach, based on Social Security + a modest pension to cover our “base nut”/core expenses, including one time expenses like new roofs & vehicle replacements (note we are delaying SS the first several years and using our retirement funds as a temporary SS income replacement for those years). We think of that modest pension as our “annuity” - in fact a couple years ago we had the option to do a lump sum payout but the numbers didn’t make sense so chose to retirement. Then our retirement funds become the “enjoy retirement” source for travel, etc…

[@acon2834]

Great podcast James. We're 61/66 just met with our Fidelity advisor who "brought up" the idea of perhaps looking at an annuity as a bridge between now, and taking SS. Question: the QLAC, is that available for both spouses (married filing jointly)?

[@dawnl4127]

I sure wish you had graphics along with this podcast.

[@Tjay-ur3qp]

At retirement, I went into a 5 year Guaranteed Annuity which basically covers my fixed overhead while at the same time allowed me to deferred taking Social Security until 70. In effect, in addition to the “peace of mind” that my expenses were covered, the Annuity also allowed my deferred SS to grow at 8% each year until 70 which will be close to an equal “ swap” then to what the annuity is paying now.

[@johngill2853]

Great job 👍 For my situation a SPIA just makes sense. Because I know as a long term saver I will not spend comfortably during a market downturn. A SPIA will allow me to spend freely that check and invest aggressively with the rest

[@jayholiday256]

I think that makes sense, monthly payments you can never outlive.

[@grnmtnskier]

Exactly - no one discusses a balanced retirement portfolio. Everybody criticizes annuities lumps all varieties in one bucket. A single premium income annuity is just like a company pension. Your stock portfolio provides the inflation protection. Ideally you never touch it except it for the inflation hedge.

[@etcomehome39]

We have an immediate annuity for 7 years and then a deferred annuity with guaranteed lifetime payout out of at least $20,000 each year. I like guaranteed income that allows me to sleep at night. We also have a long term growth bucket that is entirely equities and we don’t expect to touch. I think it depends on your investment style. But in general I think once we have won the game to retire, it’s better not to play an aggressive game and expose to market risks too much.

[@freedomlife3623]

Greed killed the bird, you are a wise & content person which is rear these days.

[@richardbryanesq]

I’ll add that as an estate planning and elder law attorney in New York I see lots of elderly people and by and large those who converted assets into annuities decades earlier are typically much more secure financially in the latter years of life than those who didn’t. For what it’s worth.

[@mnotlyon]

I would argue that's because they're paying attention to their finances. Not that annuities are a good choice.

[@timsans1170]

​@@mnotlyon And I'll add that he likely sells Annuities which pays an ENORMOUS Commission

[@grnmtnskier]

Good point - and who wants to manage the 4 percent withdrawal rule across equities and bonds in their eighties

[@markcobb8253]

@@timsans1170 blah blah blah. So does every financial product. Look under the hood. You’ll be amazed.

[@serialmigrant]

I'm ok with stressing out over markets while I am "flamingo fire", pre retired / working part time, because paying attention to my finances equates to longer mini retirements NOW, while making sure I'm not screwing over elderly me. I'm already a tad annoyed on how much time this takes NOW out of my free time. I don't think when I'm past 70 I'll be motivated to track the market etc

[@conureron3792]

I like the peace of mind annuities give. You get that monthly income, just like social security, regardless of market volatility.

[@timsans1170]

Yes but at what cost?

[@stevewagner7507]

How do you price peace of mind?@@timsans1170

[@kristiduncan8356]

I rolled a stagnant traditional IRA into a fixed indexed annuity. Best thing I have done in the last several years. I will be 55 when it ends its 10 year term and then I can either defer it for a shorter term or roll it into another investment. You don’t have to annuitize.

[@JT-eq8ze]

One option that might be worth looking at is if your planning on giving money to a college or university, they will pay you nice return for as long as you are are alive. Maybe this is not an "annuity" by definition, but it seems to work the same way. Any comments from you James would be appreciated.

[@jeremiahreilly9739]

★★★★★ Best financial advisor on KZbin. Why? Because Mr. Canole takes a holistic view of financial investing an how to get the most out of your life-not just dollars and cents.

[@dannyjensen4954]

Not taking SSI is perhaps the best and cheapest annuity you can "buy". It would be interesting if you could price out the value of the SSI annuity given certain inflation assumptions and make assumptions about how inflation will likely impact expected return of at 60/40 balanced portfolio. It would seem that people are crazy to take early SSI and while purchasing annuities from sales people on a risk adjusted basis when considering inflation as a risk.

[@user-qe6io2mm1l]

Stocks are best in a bull market (obviously). IF they drop, can you stay away from selling? (Due to need or fear). Worst: Selling based upon fear. I have 70% in equities (50% mutual funds, 50% individual stocks that I have picked). 20% cash at 5%, 10% gold/silver in safe deposit box.. KEY: NO debt.

[@jeffmac3071]

Can you discuss regulation BI as it relates to registered brokers and their fiduciary responsibility.

[@linhdang1972]

What is your thoughts of 3 year fixed annuity?

[@livingtheslolife]

Great content. Question: I am planning to retire at 55 next year and will have 4 years of living expenses set aside in 'cash' (MM, CDs). But then I need 8 more years until I reach FRA for Social Security. My portfolio is big enough to last those 8 years, but my concern is 'what if' the markets have a sustained long term correction (like from 2000-2012)? I could potentially be drawing down my portfolio for a long time. Fidelity has a SPIA where I could put up $250K now from my IRA account, and then starting in 2029 get a guaranteed $60K/year for 7 years, so it would guarantee I can cover all my expenses until SS kicks in. I know the math would say that keeping the $$ in the market I could get a better return, but peace of mind goes a long way. Also, I would still have a substantial amount of $$ in my IRA that would benefit from a sustained bull market, so I wouldn't be missing out on that. Just taking SOME of the retirement accounts and guaranteeing my cash flow. Thanks in advance.

[@swright5690]

What kinds do you have?

[@DallinBunnell]

Could you help clear up the definition of fiduciary for me? I work at a retirment planning firm, but I'm just starting in more of an "intern" type role. We do investment, income, and tax planning - and through partners estate and tax filings. We also have investment management with our RIA. I was told we are fiduciary advisors. We also offer and sell insurance and annuity products. If we recommend an insurance or annuity product as part of the plan, that's technically not held to the fiduciary standard, but rather suitability. We are not a broker-dealer for any securities, only insurance products. I'm assuming, from this definition, that we're okay to be considered fiduciaries, becuase our RIA is held to the fiduciary standard. As a consumer, how should they interpret that?

[@g.ajemian4968]

Myga’s are paying over 6% for a fixed amount of time. No fees and your money is not annuitised. If you choose wisely you can pull interest out with no penalty. If you are taking more than 6 %out per year you are risking running out odd money. Annuities like this should replace bonds i a conservative portfolio in retirement.no risk to principal in most annuities

[@584887487]

Am I wrong? I am under the impression that annuity income is taxed at regular income rates, whereas , if you say put all the $ into an s&p 500 fund, you would only be taxed on the capital gains & not on the original principal at the lower capital gains rates.

[@keithmachado-pp6fv]

Don’t forget that if you get social security you already have an annuity. One with built in cost of living increases. If a couple has $5k per month between them it would take at least $1m to buy a dual life annuity with cost of living adjustments to replace that. If you have a $2m net worth in addition to SS, you already have 33% of your net worth in an annuity. That seems like enough of a single asset type.

[@CalmerThanYouAre1]

What percentage of your clients who have achieved a $1M+ household net worth have purchased an annuity without being talked into it by someone getting a financial benefit from selling annuities (insurance agent, financial "advisor", etc)? Is there a study showing the average amount of wealth lost by purchasing annuities vs. simply owning the S&P 500 or even a 60/40 mix of stocks and bonds, as well as the amount of potential income sacrificed?

[@johngill2853]

Google Wade Phau and single premium immediate annuities

[@randolphh8005]

That would include us. We put 10% into annuities for longevity protection. Our plan is to spend down our portfolio over 20 years, by age 85. We have a plan that can only get derailed by health or death. One SS check will be maxed out, that and the annuity will protect against longevity. In the meantime we spend down the $million plus and enjoy life. Most people with assets leave a lot of money to their legacy. We are choosing to spend ours while we can.

[@richkoehler6237]

What happens if the company that issued your annuity goes bankrupt?

[@myvenusheeler]

State guarantee kicks in. By the way, people are always saying when these insurance companies go out of business but you very, very rarely ever hear of an A rated or higher insurer going out of business.

[@walterp8697]

All of these questions have been answered years ago. ? Replace bonds with Income annuity.

[@digitalcanvas4444]

Thank you for this video. My financial advisor has been prodding me for over a year to buy an annuity and I've been dragging my feet because I just haven't been convinced... it just didn't seem right. Your video explains why my conscience has been telling me "no."

[@markrand652]

You're incorrect stating that the money will simply be gone if you our say your you and your spouse (joint annuity) pass away early, it can certainly be structured for all remaining principle to go to a beneficiary, or payments to continue to a beneficiary for certain time periods, such as 10 or 20 years. There's many ways to structure that particular product.

[@larriveeman]

plus they will probably have social security

[@Holly-fz2pr]

How does SS get calculated? I worked full time starting at 23 and would like to retire at 58 (that would be 35 years of working). Does social security get calculated based on my income from 23-58 or would it be 35 years from my retirement age let’s say 67 which would mean a bunch of the later years I have zero income.

[@DaystarHiker]

You can an annuity (most?) that have a death benefit. So the money is not 'just gone'

[@linnyh8242]

The fiduciary standard does not apply for annuity or insurance recommendations EVEN FOR THOSE WHO ARE FIDUCIARIES, it only applies to investment advice.

[@VisitorsWelcome]

My core expenses are covered by Social Security + a small pension + a TIPS ladder + an annuity. Fidelity provided multiple quotes for deferred annuities. I split 10% of my Roth IRA among two insurance companies. Beginning in 5 years, I get $1 for every $13 I spent, and increasing 3% each year to offset inflation, tax free. Guaranteed to pay me (or my heirs) at least what I put in, and insured by my state.

[@rayzerot]

Inflation adjustments are a nice touch!

[@user-st2ix9qh4v]

What company and type annnuity is that? Sounds interesting

[@rhodastephens-yoder5693]

When you buy an annuity, you are assuming that the insurance company that is providing the annuity will still be in business 20, 30, or even 40 years from now. I would rather keep control of my money myself with the advice of my financial advisor.

[@randolphh8005]

Annuities are insured!

[@July.4.1776]

Everyone already has an annuity it’s called social security.

[@Ray-qv9vb]

lol. Your broker or insurance guy loves annuities too. Some pay up to 8% to the broker. Then they will do a roll up to a “better” annuity and get paid again. When you find a sucker who will buy it, just keep reselling it year after year. Plus there are trailing commissions so you can get paid for doing nothing

[@kay203]

If you lose sleep overnight in market turbulance, get some annuity (maximum 20~30% of your total asset) to get that peace of mind. That should help you with great recession-type environment. Otherwise, put the rest into stock and bonds for more cash flow.

[@davepaturno4290]

33% here. That, along with SS is more than enough for expenses and even potential unforeseen expenses. The IRA can then assume more risk and potential gains.

[@randolphh8005]

Most people recommend considering your annuity and your SS as the “bond” par of your portfolio and then increase your stock allocation with quality index funds

[@grnmtnskier]

@@randolphh8005 Exactly - am working on the same plan - makes complete sense. Everyone assumes that annuities are replacing your entire portfolio when they disparage them.

[@grnmtnskier]

You are spot on - my plan as well

[@uglyone]

[28] Come to me, all who labor and are heavy laden, and I will give you rest. Matthew:11:28

[@kenhansen8186]

Annuities Stink! Takes your principal and just gives you income. Unless you live to be 90 doesn't make sense. Also principal is not guaranteed by the Federal government.

[@randolphh8005]

The annuity is State insured

[@jayholiday256]

That’s right, it’s a transfer of risk product. I don’t want to be the guy watching stock business shows on cable news daily in retirement. This isn’t an either or proposition, you shouldn’t get more than a third of your nest egg in an annuity

[@davepaturno4290]

33% is what we put in. That's good enough for us.

[@gisnacherri3075]

Waiting 85 to get your money sounds absolutely bonkers

[@pensacola321]

Certain type annuities are selling like hotcakes. I am retired. I have several different types and I love them.

[@Unplugged704]

So if both die, annuity goes away! The remaining doesn’t even go to their children? Wth…????

[@jmb-cm7mr]

Not true my father-in law passed away in Sept of this year he had a few Annuities that went to his Son and Daughter.

[@randolphh8005]

Annuities can be bought with or without refunds at death

[@GETole]

​@jmb-cm7mr He had to pay for a rider to make that happen.

[@markwat54]

You can get an annuity that will have a death benefit, but that will bring down the monthly payout. If you want the maximum monthly payout, there will be no death benefit. Think of it as insurance against living a very long time. If you dye early, it was a bad use of money, but you are dead so you don't know it. On the other hand, if you live a very long time, it will have been a very good use of money, and you will be very much alive to realize that. Same argument to taking Social Security at 70 ands not earlier.

[@davidgreen4038]

Fixed Index Annuities can have a death benefit.

[@andersstengaardjensen2208]

If the word goes to hell won’t the annuityissuers go bankruptnand stop honoring their obligations under the annuity-contract (“covenants”?)?

[@JustinCase-em6ql]

No! Besides you already have one. It's called Social Security.

[@freedomlife3623]

The commission you pay for purchase an immediate annuity is just once 2%-3%, the management fee on your portfolio is every year. Lots of financial advisor has the conflict of interest as they wish to keep their clients portfolio under management as long as possible.

[@jimmarka3983]

never

[@jaylynn7493]

When it makes sense: when you can’t manage your cash flow on your own.

[@TorcethoTorce]

I am concerned that in every scenario James is always selling the stock market as a retirement strategy… are you being compensated from Wall Street? Please show us what a retirement strategy looks like without relying on stocks and bonds and Wall street. Offering this alternative retirement strategy will help us “your viewers” determine what is best for us. And in addition prove that you really are on our side and trust worthy…. Right now I am not so sure….

[@acon2834]

The easy answer: if you have enough cash to rely on returns form savings and CD accounts, THAT is your strategy. If not, you need to look at other areas... I don't think he is a "shill" for Wall St.

[@MatrixMatched]

How about you be my financial adviser? But I haven’t reached the $1 million mark yet😊

[@jakemcmahon5603]

No, just no.

[@kens805]

Nope

[@greenbeginner9221]

I'm at 6 minutes. Does he ever define what a fiduciary is?

[@greenbeginner9221]

I'm now at 26 minutes and he never defined what a fiduciary is.

[@greenbeginner9221]

I just followed what he said... again ... using his time stamps. He never defined what a fiduciary is. Is he just forgetful or am I wasting my time with his channel?

[@GETole]

​@@greenbeginner9221He 100% defined it.

[@ggigi3453]

At 80s 90s, you don't even recognize your own children, or not able to feed yourself, you bet you still can check stock or fund???