As discussed in our post of November 27, 2021, balancing the sometimes-conflicting requirements to grow, protect and carefully spend household assets is an important element of a financially successful retirement plan.
In that post, we also said,
“It may make sense at this time to invest in life annuities rather than bonds to protect household assets. And while we are not investment advisors and will certainly not push you to buy an annuity, we, like many others who ponder “the annuity puzzle”, wonder why annuities have such a bad reputation with the general public. Very few of us have similar issues when it comes to buying other types of insurance to protect our assets, such as health insurance, home insurance, flood insurance, life insurance, etc. Fixed life annuities can be viewed as just another form of insurance that protects against longevity and investment risks.
In his December 14, 2021 Advisor Perspectives article, “When Advisors Violate their Fiduciary Duty”, David Macchia echoes our comments when he says
“It’s strange that some advisors reflexively reject recommending income insurance but would never leave their homes uninsured against fire, or risk the financial liability associated with driving an uninsured car.”
We agree.
Mr. Macchia goes on to assert that a financial advisor’s fiduciary duty is breached when the advisor fails to recommend investment in simple life annuities for certain types of households. He also quotes Dr. David Blanchett, a well-respected retirement researcher and someone we quote in this website frequently, as having recently said that that advisors breach their fiduciary duty when they fail to recommend guaranteed income products (annuities). We asked Dr. Blanchett to confirm this statement and he said, “Technically, the quote would be [advisors breach their fiduciary duty when they] "fail to consider" [annuities]. “It may be the client doesn't need an annuity, but too often advisors don't even consider them in the planning process.”
“Constrained Investor” vs. Actuarial Balance Sheet
We agree with Dr. Blanchett and Mr. Macchia that life annuities may not be necessary investments for all households. Mr. Macchia argues that life annuities should be considered by households containing what Mr. Macchia defines as “Constrained Investors,” but annuities may not be needed for households containing Overfunded or Underfunded Investors. Similarly, when using our Actuarial Financial Planner, life annuities may not be necessary for overfunded households (with large Rainy-Day Funds) or for households that cover their Essential Expenses with Social Security or other sources of guaranteed income. Life annuities, may, however, be a good investment for those needing to strengthen their Floor Portfolio to sufficiently cover their essential expenses.
Summary
This post asks whether lifetime income products (simple life annuities) are part of your investment strategy in retirement. It is a simple yes or no question. If your financial advisor doesn’t even consider life annuities to be a viable component of a solid investment strategy, you might want to ask why. If you don’t have a financial advisor, you might want to consider whether it would be beneficial for you to buy a life annuity (or several) as part of your plan to grow, protect and carefully spend your assets in retirement.
