Do I Want an Annuity? Do I Already Have One?

By Dr. Don Taylor, Ph.D., CFA,

Dear Dr. Don, What do you think of a deferred, fixed annuity for a retiree?

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Thanks, -- Libby Lifetime

Dear Libby, I sent you a note to get a little more information. I'm glad I did because you gave me a bucketful. You're single and 69 years old, and you have a teacher's pension, Social Security benefits and a family inheritance. You have a long-term health care policy, a whole life insurance policy and funeral insurance. Your home is paid off, and you expect more money to come in from your inheritance as assets are sold.

You've been working with an adviser from a major financial institution, and that professional has put you into a program that looks to match your life goals with your retirement income benefits. It sounds like, somewhere along the way, another firm has turned your head and has you considering moving your investments into annuity products sold by them.

You told me that the insurance company offering the annuity contract has an A rating with the Better Business Bureau. That's not the benchmark you want to use in evaluating the financial strength of an insurance company. The typical yardstick in measuring the strength of an annuity contract is to use the firm's A.M. Best Financial Strength Rating.

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The company offering the annuity product you're asking about has an A.M. Best Financial Strength Rating of B++. A.M. Best ratings range from A++ (Superior) to S (rating Suspended). The company's B++ rating is classified as "Good" and considered a "Secure" rating by A.M. Best, in contrast to lower, "Vulnerable" ratings.

Annuity products can be plain-vanilla or have so many bells and whistles that you'll think it's a calliope. I don't see a plain-vanilla deferred, fixed annuity as an important part of your financial plan, but that's not what you're being offered -- you're being offered the calliope.

You already invested $25,000 in the contract before sending me your note. The time to reflect on whether you're making the right decision, however, is before you sign the annuity contract. You wrote because the annuity salespeople are pressing you to commit more money to this investment.

You have at least two sources of annuity income already: your teacher's pension and your Social Security benefits. The Social Security benefits have an annual cost-of-living adjustment, as does your teacher's pension. Longevity risk shouldn't be a dominant concern in your financial planning.

Give your adviser the opportunity to meet with you and discuss your life goals and portfolio. Try to figure out what it was about the annuity product that turned your head, and see how the adviser responds.

You want to be comfortable with your adviser and how your money is invested. If you can't get to that point with your current adviser(s), then get a second opinion by hiring a fee-only adviser on a consulting basis to review the plans for your investments.

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