Why Buy An Annuity? In this video and in the article below, Bob Powell interviews financial planner Dana Anspach to answer the question: Why buy an Annuity? Dana emphasizes the importance of quantifying how adding an annuity impacts the overall retirement income plan, using metrics like fundedness ratio, liquidation value, and coverage ratio to measure the annuity’s effect on financial security and income stability. Anspach explains who should consider buying an annuity and how to quantify the value an annuity adds to a retirement income plan.

Article: Who Should Consider Buying an Annuity?

Annuities often get a bad rap, seen by some as complex financial products pushed by commission-driven salespeople. But according to Dana Anspach, CEO of Sensible Money, annuities can play an important role in a retirement income plan for the right person. “Ultimately, annuities are great at one thing: guaranteeing income for life,” says Anspach. She cautions against annuities that try to be a “Swiss army knife” promising upside potential, death benefits, and other features beyond just providing guaranteed income. “I think anything that tries to be all things to all people isn’t going to be good at any one of those things.”

Protecting Against Unforeseen Events

Anspach sees the value of annuities in providing a permanent, guaranteed income stream that can protect retirees if their other assets are depleted due to fraud, poor decisions, or cognitive decline in old age. She gives the example of a client couple with a $4 million portfolio who ended up losing it all after the husband died and the wife moved the assets to a firm that embezzled the money. “An annuity would have provided some kind of permanent result…there would have been this base layer of something they can’t outlive. It would have had a permanent impact on their life.”

Why Buy An Annuity?

While annuities aren’t right for everyone, Anspach says there are certain criteria that may indicate an annuity could be a good fit:

1. The retiree is “constrained,” meaning their spending is high relative to their assets and a market downturn could jeopardize their retirement.

2. The retiree wants to cover their essential expenses with guaranteed income sources like Social Security, pensions, and annuities.

3. The retiree has a strong preference for the peace of mind that comes with guaranteed income.

Anspach gives the example of a client who wanted to put $2 million, about half their portfolio, into an immediate annuity because they were so nervous about the markets after experiencing the 2008-2009 crash. “For them, that peace of mind, even though interest rates were low at that time, it didn’t matter. They wanted that peace of mind of knowing that they had this large chunk of guaranteed income coming in.”

Quantifying the Value of an Annuity

Anspach emphasizes the importance of being able to quantify how an annuity impacts the overall retirement income plan. Her firm, Sensible Money, uses metrics like the “fundedness ratio” (total assets relative to needed cash flows), liquidation value at the end of the plan, and “coverage ratio” (percentage of total expenses covered by guaranteed income sources). “What I get passionate about is the ability to quantify it. So does adding the annuity add value to the plan?” says Anspach. “That’s where I see a lot of the industry, oh, you know, you should consider this and they talk about the product, but when you incorporate it into the plan, you have to be able to measure or have some set of metrics that in my view can quantify and say, yes, this adds value to your plan.” She gives an example of a single woman client with a $1.2 million portfolio who put $100,000 into a deferred income annuity. By Anspach’s calculations, this improved the client’s fundedness ratio, increased her projected estate value, and raised the percentage of her expenses covered by guaranteed income in retirement. “So we had quantifiable metrics to say adding this to your plan improved the outcome in terms of how we think of your level of financial security,” explains Anspach. “Your level of income stability, your likelihood of meeting the standard of living that you wanna meet throughout your lifetime. Those are metrics we can look at to say, yes, this improved the situation.”

Why Buy An Annuity –The Bottom Line

Annuities aren’t a one-size-fits-all solution, but for certain retirees, they can provide valuable guaranteed income and peace of mind. The key is working with an advisor who can quantify the impact of an annuity on the overall retirement plan. “Preference certainly has something to do with it,” says Anspach. Some retirees will dismiss annuities based on preconceived notions, while others who understand the benefits may still prefer to live off their invested assets. Ultimately, the decision to purchase an annuity is a highly individual one that should be made in the context of a comprehensive retirement income plan. But for the right person, an annuity can form an important part of their “base layer” of guaranteed lifetime income.

If you’d like to watch more videos on finStream TV featuring Dana Anspach, please click this link: https://www.finstream.tv/featured/dana-anspach/