The Retirement Income Pyramid. Annuities; you keep living, they keep paying.


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Whoa folks! A Retirement Income Pyramid change!

An addition and a major change to the Retirement Income Pyramid today.  Annuities join the Retirement Income Pyramid just above Social Security and Pensions move up on the retirement surprise risk scale above annuities!

Our earlier looks at the retirement income pyramid talked about Social Security and pensions. In this post, we’ll focus on annuities and also shift pensions a little more up the pyramid. Annuities are part of the secure, stable base, but in a slightly lighter green.  The lighter green shows safety but with a little more risk than Social Security. Just like Social Security and pensions, we should know where we might find annuity surprises!

Pension risk increases

We’ll spend more time on why my risk assessment of pensions shows increased risk in a future post, but I can tell you that I have read research and anecdotal articles that have moved my sentiment.  Take a look at this Buffalo News article about the Teamsters pension plan – their pensions payments were cut 30%.

Boring full disclosure here

I am employed by a life insurer that sells annuities and formerly worked for a different life insurer that sells annuities (I consider them both outstanding firms in terms of safety and keeping the promise to insureds/annuitants).  My wife and I own annuities, as part of a balanced total retirement plan, for the guaranteed lifetime income with potential for income growth. I am not a licensed agent or registered representative and I do not make recommendations for your specific situation.  These blog posts are for general education.

What can an annuity do?

First, let’s ask the question of what can an annuity do for you?  The simple answer is that an annuity will provide you provide guaranteed lifetime income.  I joke that my annuity will keep paying even if I live to 400. The joke part is the 400, the serious part is that the annuity really would keep paying.  Please note, we’re discussing annuities and guaranteed lifetime payout riders here, not deferred annuity purchases with tax-deferred cash buildup, though those usually are a prerequisite to the payouts.  And yes, annuities have expenses, for guarantees and death benefits.

Can you have a bad retirement surprise with an annuity?  Very similar to pensions, yes and no.

Yes – surprise risks

-Insurance companies, just like pension trustees, sometimes do make mistakes and fail. The annuity payments are only guaranteed by the insurance company issuing them, not by any governmental entity (no FDIC or PBGC for example).

-Insurance companies are closely monitored by the states in which they issue annuities for financial stability and the ability to keep their promises, and the states usually act proactively on potential issues to make sure the insurance company keeps its promises to the policy owners.  Unfortunately, some insurers have failed for various reasons.

-While the annuity pays you, inflation can eat away at your purchasing power.

No – things that help avoid or mitigate surprises.

-Insurance company actuaries are accountable for certifying that the firm can meet its obligations to policy owners and can be held criminally liable if they know of fraud issues and do not report them. In my opinion, these women and men are very smart, very dedicated to making sure the firm can keep its promises, and very thorough in their analysis and actions.

-There are state guaranty associations which will step in to make some level of payments to policy holders if a company should fail.  Bottom line, a highly rated (Best, Fitch, Moody’s, etc.) insurance company is almost as secure as a pension guaranteed by the PBGC. And remember, not all pensions are covered by the PBGC. Your insurance company will be monitored by the state and will be part of the guaranty association.  Please note state guaranty associations have limits, just like the PBGC.

– Some annuities have inflation protection available, at an extra charge.

NOLHGA! The National Organization of Life and Health Guaranty Associations. (I love to try to pronounce it.  Sounds like the noise made after taking a bite of some bad medicine and knowing you can’t spit it out…)

NOLHGA states, “State guaranty associations play a vital role in keeping the promises made by the insurance industry and protecting policyholders when their company goes out of business. Since 1983, state guaranty associations have:
Provided protection to more than 2.5 million policyholders
Guaranteed more than $22 billion in coverage benefits
Contributed approximately $6.5 billion toward the fulfillment of insurer promises”

My opinion is that with proper selection (check your insurer’s ratings) and diversification (I have annuities from two highly rated firms), your annuity is pretty safe from surprises.

Actions you can take include:

-Learn about annuities with guaranteed lifetime income benefits which pay you an income for as long as you live, even after the funds you used to pay for the annuity hit zero.  (If there happen to be funds left when you die, your beneficiaries will receive them.) My opinion is that annuities that have a potential for increasing income could help offset inflation, but as always, your particular situation is a key to these being appropriate for you or not.

-Try your own annuity quote!  Abaris lets you run your own quotes at this link which requires  you to register.

-Get professional advice from a trusted financial advisor.

-If you own an annuity, an insurance policy, or are just curious, read up guarantees in general and by your state, here at NOLHGA

Questions, comments, or suggestions for retirement surprise areas you want to know more about?

-Leave a comment
-Use ‘Contact’, above, to send an email.


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