I'm in the Midwest this week, visiting family. I was walking down the bank of the Des Moines River, marveling at the destruction the flooding had caused, chatting away with a relative about... you guessed it, retirement income... my favorite topic.
I was sharing my admiration for a particular type of annuity product that guarantees you an income stream worth 5% of your initial deposit, for life, with the chance that your income can go up if the underlying investments do well, but no risk that your income can ever go down. I think it's a nifty product; it's hard for me not to talk about it.
My enthusiasm going strong, I got done with my monologue, and my relative says, "But, between my own and my wife's social security and pensions, we'll have over $10,000 a month of guaranteed income. Why would I need an annuity?"
A long pause on my part. "Well, you probably wouldn't."
You see, not in "planning mode" at the time, I engaged in a common mistake. I started talking about product before understanding anything about this person's situation.
I went on to explain to them that the first step is to establish their required expenses. Then you build a "floor" of guaranteed income in an amount sufficient to cover those required expenses for life.
Funds in excess of what is needed to build the floor can be invested in a variety of ways to create additional income.á Some people may want this additional income guaranteed; others will see no need to guarantee it.
An annuity is a form of insurance. With any annuity you are paying for a guarantee of some kind. You have to decide if that guarantee is worth paying for. If your floor of guaranteed income is sufficient to cover all your required expenses, an annuity may not offer an additional benefit that is worth paying for. Other income producing investments may suffice.