Last year my wife and I each bought a fixed index annuity with a guaranteed lifetime benefit. The main reason why is we can begin withdrawing a stable annual income from the annuities when we hit retirement in a few years and the income will not go down and will last as long as either of us lives. There is a cost for this guarantee, the annuity company charges one percent per year.
We got our annuity statements last month and it showed the interest earned. Then it showed a deduction of $1,050 subtracted from the interest earned and the net amount credited to each policy. Now, I know what that $1,050 is; it is the one percent fee the insurance company charges to guarantee they will keep paying the stable annual income even if cash in the annuity account goes to zero because of the money taken out. Intellectually I get it, but it’s one thing to look at a brochure and talk about one percent fees and five percent income and such and another to see the cold hard cash taken away. Of course we’re keeping the annuities because I understand the purpose of the fee—it’s the insurance cost to protect our lifetime income—but this got me thinking that retirement reality is a whole lot different than retirement imagining.
It’s one thing to read that “a typical couple needs 80 percent of their pre-retirement income to maintain their standard of living in retirement.” It’s a whole ‘nother thing to get out the checkbook and credit card receipts and see what you’re spending your money on today, figure out what you’ll need to spend in retirement, and then try to figure out exactly from where the money will come. Sitting down and creating this budget makes you face retirement reality.
Creating a budget also focused my attention on looking at what happens to the Social Security checks when I die. If I die first my wife loses the lower of the two benefits—and I don’t want her to be financially squeezed. My less than exact solution was to buy a 20 year term life insurance policy on myself. The death proceeds should be enough for my widow to buy a life income annuity that will replace the missing Social Security income (if I die within the next 20 years). This isn’t a topic I’ve seen much written on, it simply occurred to me when I was looking at our Social Security Statements as part of my retirement reality check and asking, “What if?”
A retirement reality I faced that helped me decide to buy the annuities a year ago was knowing that stock markets go down. What we’re told is the grand retirement plan is buy stocks and bonds while we’re working and then sell a certain percentage each year to create income in retirement. We’re supposed to take the same percentage of income out each year, but I knew I’d try very hard to not sell my investments when the market was tumbling. We bought the annuities so we’d have a steady income, regardless of what the market does, and hopefully wouldn’t have to sell investments when the market was down. All of those pretty retirement planning worksheets are just so much paper if you know in your heart that you can’t follow the plan.
In the midst of all this frugalness, my wife and I have taken a larger than originally planned chunk out of our investment mountain and placed it in a money market account. The plan is to use the money to take a river cruise through Europe the first year we retire and an extended Alaskan cruise the next. Another dose of reality is you don’t live forever; we’ve decided to enjoy retirement and let at least a part of tomorrow take care of itself.
provides research and consulting services to insurance companies and financial firms in a variety of annuity areas. He also serves as director of research for the National Association for Fixed Annuities and as a research fellow for Webster University. In 1994 he wrote a book to help banks market investment and insurance solutions to their small business clients. In 1996 he produced the first independent hypothetical return monthly publication comparing all index annuities on the market, and in 1997 created the first comprehensive report of index annuity sales, products and trends, "Advantage Index Product Sales & Market Report" (quarterly). His insights on the annuity and retirement income world have appeared in hundreds of publications. In 2006 the National Association of Insurance Commissioners asked him to address their annual meeting and teach regulators the realities of index annuities. He was invited back in 2009 to talk to the NAIC about the effects of aging on senior decision-making. He is a frequent speaker at industry functions. Prior to forming Advantage Compendium, Marrion was president and owner of an NASD broker/dealer with offices in nine states. Previous to that he was vice president of a life insurance company and vice president of an NYSE investment banking firm. He has a BBA from the University of Iowa, an MBA from the University of Missouri, and a doctorate from Webster University. Marrion can be reached at Advantage Compendium, Telephone: 314-255-6531. Email: firstname.lastname@example.org.