Q: Edith recently expressed her concern about outliving her savings and asked, “Dear Derek: I am concerned about outliving my savings, but I hear on TV that annuities are bad, is true? Should I hire a fund manager and take on more risk to possibly grow my money faster than I spending it?
A: Edith, this is a top concern for retirees. First, annuities, as well as a professional money manager are not all bad. I think it comes down to understanding risk. The biggest risk you are most likely facing today is Longevity Risk. Longevity Risk is a multiplier of several other risk factors in your life. When you consider that the longer you live the probability that you will endure more market risk, interest rates will rise, you may have a long-term care event, you may withdrawal too much too soon and run out later in life—all increase the longer you live.
So in my abbreviated opinion, a 0% or 1% fee associated with an annuity that is strategically indexed so that you can never lose money due to market corrections and guarantees that you have a lifetime stream of is perhaps a better use of your dollars versus working with a fund manager who can’t protect you from loss protection and can’t ensure you have an income stream for life. Insurance companies can provide guarantees while the fund manager(s) cannot. I find that most retirees prefer guarantees versus paying for an imaginary “crystal ball” when the cost of ownership related to a fund manager is similar or greater than 1% annually.
