The Annuity Puzzle

The greatest fear most seniors face during retirement is outliving their nest egg. Yet when given the choice of exchanging a lump sum of money for a guaranteed lifetime income stream – the act of annuitization – most opt to keep the less secure lump sum. In fact, insurance industry statistics show that only about 5% of annuity owners elect to annuitize.

This paradox is called the “annuity puzzle” and contradicts an ever-growing number of economists and financial advisors who agree that guaranteed income for life provides far better retirement security than cash in hand. Understandably, the $100,000 squirreled away at the bank seems like more money than the $680 a month for life a 65-year-old male would receive by annuitizing the same amount.

One reason for the annuity puzzle is that annuity agents often fall short of educating their clients, both before and after the purchase. Purchasers don’t ask enough questions. Add to this the aversion seniors have of making changes in their status quo. Then there are the costs of the insurance company’s guarantee of dolling out monthly payments for life, the gamble of how many years one might live to enjoy those payments, and the complexity of understanding how annuitization works in the first place. Finally, with traditional annuitization the payout terms are carved in stone, never to be changed, and your premium stops earning all but the stingiest rate of interest.

But there is a versatile new retirement solution on the horizon. Many annuity carriers, including industry giants like Allianz and Sun Life Financial, have developed a fixed indexed annuity with multiple choices and flexible options that allow for adjustments along retirement’s road. Payout terms are anything but carved in stone, and various options allow your account value to continue at full earning potential both before and after entering payout mode.

For example, when you are ready to start taking income from your annuity, you can choose from a range of payout options including income you cannot outlive. This option allows you the added flexibility of suspending, restarting or revising your payment amount (within limits), or cancelling your contract and receiving the remaining accumulation value as a lump sum “walk-away.”

The unique feature of this hybrid retirement product is your potential to earn above-average interest during both the accumulation and payout phase. Instead of settling for “rocking chair” earnings once you begin receiving payments, your annuity continues earning as it did during the growth phase. One may be tempted to envision an ever-replenishing fund from which income flows but balances never fall. This is not how it’s designed to work.

But this new retirement solution is designed to replenish some of your account value even during the payout phase. Add to this the unique advantage insurance products have of providing long-term tax deferral to help your retirement assets grow. Your earnings, once credited, are locked in and protected against equity market declines. Finally, if your retirement circumstances should take an unexpected detour along life’s road, you now have the versatility of walking away with a large chunk of that lump sum – even after perhaps years of annuity payments. Now the only remaining question to the annuity puzzle is, “What will they think of next?”

For a free information kit, consultation and analysis of your retirement plan, please contact Jim McGeehan at Oaktree Capital LLC ph. 404-290-9982   or

Leave a comment

Your email address will not be published. Required fields are marked *