Maximizing Your Annuity: Advanced Strategies for Savvy Investors


Fri Feb 02 2024

Maximizing your annuity.
maximize your annuity

What's the worst catastrophe you could encounter while journeying to another planet? Running out of fuel! And what's the worst catastrophe you could face during retirement? Running out of money. An annuity is one tool you can use to help ensure you outlive your money. We'll discuss maximizing your annuity using advanced strategies for savvy investors. 

A Brave New World

Video killed the radio star, and 401(k)s killed the pension. Today, only about 10% of Americans working in the private sector have a pension plan, while about 50% have a 401(k) or similar retirement account. 

Pensions typically provided guaranteed income for life, while a 401(k) and other retirement accounts can run out of money, particularly if you are on the wrong end of sequence or return risk. Sequence of returns risk is the risk of a market downturn happening in the last few years before you retire and/or during the first few years of your retirement. A down market in those critical years can have a negative impact on your retirement savings. 

One option to help guarantee retirement income is an annuity. 

Annuities: Rocket Fuel for Your Financial Security

Annuities are an insurance product that provide a guaranteed income stream. Payments come at regular intervals, and the earnings provide tax-deferred growth until you begin making withdrawals. Most annuities provide a death benefit, so they can be an important part of estate planning. 

And securing a lifetime income is more important than ever. According to the Society of Actuaries, one in three men and one in two women who are currently in their mid-50s will live to be 90. And there is a 50% chance that at least one-half of a married couple currently aged 65 will be alive at 92. 

Diversify With Annuities

Even the most casual investors know that a key component of successful investing is to properly diversify your investments. Annuities are not an investment product; they're an insurance product, but they can still play a part in your diversification strategy. Because annuities provide guaranteed income, they can offer diversification as a hedge against stock market volatility. 

In the face of a down market, you can use your annuity income to pay for your living expenses, leaving your stock investments the time they need to recover. Annuities can be used the same way during an up market; you can leave your investments to reap the gains and pay your expenses with your annuity income.

Delay Social Security

The age of eligibility to begin collecting Social Security benefits is 62, but the full retirement age is 67, and waiting until you reach age 70 will enable you to receive the maximum benefit, so it can be worth the wait. 

The delay, though, can cause a gap in income and make it difficult to meet all of your living expenses. One option is to roll over a portion of your tax-deferred retirment accounts into an annuity. The guaranteed, steady income from the annuity can help bridge the gap until you start taking Social Security benefits.

Reach the Stars With an Annuity Ladder

annuity ladder

Annuity laddering is a strategy that can shore up your income and help reduce your exposure to interest rate risk in retirment. Each annuity is a rung on the ladder and provides a set cash flow reflective of a specific interest rate. 

There are various ways to structure an annuity ladder. One way is to spread your principal over a few years. Let's say you have $500,000 to buy annuities. Rather than spending the entire amount in a single year, you spend $100,000 a year for five years. This method will stagger the maturity dates and can harness different interest rates. 

Another method is to buy different types of annuities. A portion of your money can be used to buy a fixed annuity and another to buy indexed or variable annuities. You can also ladder the payout dates, the age at which you begin receiving the annuity payments. 

Do A Strategic Roth Conversion

Non-qualified annuities can be converted to a Roth IRA. The process involves transferring money from an annuity to a retirment account that offers tax advantages for withdrawals. You'll cash in your annuity, pay the required taxes on the earnings, and transfer the remaining money to a Roth IRA. 

The money in the Roth IRA grows tax-free, and withdrawals, including earnings, are not taxed in retirement. This is in contrast to annuities, where the payments include taxable ordinary income and non-taxable principal. This conversion can provide long-term tax advantages, especially if you expect to be in a higher retirement tax bracket. 

Because this strategy has serious tax implications, it's not appropriate for everyone, and you should consult a financial or tax expert before making a decision.

Final Thoughts

Annuities may not be an investment product, but they can still be an important part of your retirment investing strategy. Used well, annuities can provide stable income, diversity, and tax benefits. 

Enjoy the retirement journey, and we'll see you in the stars!