Ignoring the cure, or "Why I don't want an income annuity"

Imagine being chronically ill, suffering with the symptoms of your illness, all the while ignoring the cure that is readily available. Seems senseless, right?

Well, there are millions of financially ill retirees today in the wake of the worst financial crisis in eighty years. They're wondering if their retirement incomes will last as long as they do given the shrunken size of their nest eggs invested in the financial markets. Those retirees who own income annuities, while not immune from the financial concerns caused by the markets, are likely feeling much more confident, comforted by the knowledge that their payments will continue to show up in their bank accounts whether the bear market continues or not.

The time would appear ripe for income annuities, yet standard objections aren't likely to disappear, crisis or not. Perhaps it would be helpful to assume the role of an "income objector" today in the wake of this crisis to see if the arguments remain valid.

I Don't Want an Income Annuity Today Because:

I'll lose control of my retirement asset
True- in most cases, you will not be able to get your lump sum back once you make the decision to buy an income annuity. You've exchanged a lump sum for the promise of a monthly stream of lifetime income. So all you'll get is......income for a lifetime. Sound bad right now?

Your retirement nest egg today is worth 30-50% less today than it was a year ago, so be honest when answering this questions. Do you feel more "in control" because you still own that asset and and haven't irrevocably converted it to lifetime income?

The income you could have purchased a year ago with your retirement assets is likely 100% greater than what you can now generate on your own through a withdrawal program. For instance, if your portfolio was worth $500,000 a year ago, an income annuity might have generated about $35,000 a year for life for a 65 year old couple, guaranteed until the last spouse dies. Now that $500,000 nest egg is worth maybe $350,000. At a 5% withdrawal, that's $17,500 a year in annual income that would be generated today - exactly one half of what could have been generated in an income annuity a year ago.

To have that $17,500 income grow to the $35,000 that would have been generated by the income annuity a year ago, you'd need to have your asset value - $350,000 - double, to $700,000. Since you still need income, you continue your 5% - $17,500 - withdrawals each year. Your portfolio will need to grow at approximately 12.2% per year in order to have your asset value reach $700,000 in ten years. I arrive at this number by simply taking 7.2% - the annual return that doubles money in ten years - and adding 5% to it to compensate for the 5% withdrawal coming out each year.

Again -how "in control" do you feel having ignored the dull, permanent, inflexible income annuity?

I want to keep my options open and have all my assets liquid
This presumes there is the possibility that in retirement you'll need to call in all of your discretionary assets and spend them in one fell swoop. List below the potential life events that may require you to write one check equal to the value of all of your discretionary retirement assets:

Now that you've listed those events, ponder this question. Assuming you still have income needs, and yet you've liquidated all of your assets, where will your income come from?

I don't want to disinherit my children
This presumes you think an income annuity is an all or nothing proposition. In fact, you can own other income-producing assets (mutual funds, deferred annuities, etc.) and an income annuity. But just for the sake of argument, let's assume you do put all your assets into an income annuity. By doing so, you've likely assured your adult children that you won't need to move in with them due to lack of income and retirement resources. Alternatively, by not owning an income annuity, and risking depletion of retirement resources, there is the possibility you'll need to move in with the adult kids. Which sounds more palatable to both you and your adult children: remaining independent but leaving nothing after your death, or moving in with them and leaving little to nothing after your death?


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