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My advisor recommends investing more than 50% of my portfolio in annuities. What are you saying?
– Georgia
As with most personal financial decisions, a lot depends on the specific details of your situation. Fifty percent would probably be on the high side for most people, but that doesn’t mean it can’t be the right amount for you. Some want or even need more of their portfolio in an annuity.
Let’s talk about the reasons why you might want to put so much into an annuity, and the reasons why someone might not. Compare these items with your own situation, goals and preferences and decide whether 50% is the right amount.
Consider using this free tool to match with a financial advisor if you’re interested in tailored advice based on your circumstances and goals.
A woman and her husband are relieved to know that their annuity payments will cover their living expenses.
Guaranteed income is the fundamental reason to buy an annuity. Although there are many types of annuities, an immediate annuity is the simplest and most straightforward option. With a lifetime immediate annuity, you exchange a fixed amount for a series of regular monthly payments. Like a pension or Social Security benefits, lifetime immediate annuity payments last for the rest of your life.
With that in mind, let’s take a look at some of the top benefits of purchasing an annuity. The more these benefits appeal to you and make sense within the context of your financial plan, the greater your allocation to an annuity can be.
When you receive income from an annuity, you don’t have to worry about outliving your savings, which is a major concern for many retirees.
When considering how much of your portfolio to allocate to an annuity, think specifically about how much guaranteed income you need to cover your living expenses. This is known as an income floor. That way, if the market is bad and your investments don’t perform well, you can be confident that you will get through it.
However, if your Social Security benefits and/or retirement payments already provide enough income to cover your living expenses, a larger guaranteed income may not be necessary. (But if you need an expert to further assess your retirement income plan, consider matching with a fiduciary advisor.)
A fixed annuity, meanwhile, pays a guaranteed interest rate regardless of how the stock market performs. Once your payments begin, they are no longer subject to the volatility of market fluctuations the way stocks, bonds, mutual funds and ETFs are.
If you have a very low risk tolerance and don’t like seeing your account value fluctuate, annuities can protect you from the emotional uncertainty of a volatile stock market. (And if you need help evaluating your risk tolerance and finding investments that match it, consider working with a financial advisor.)
A financial advisor discusses annuity options with a client.
So how much is too much when it comes to investing in annuities?
To determine whether it is appropriate to put 50% of your money into an annuity, it is worth looking at some of the potential disadvantages of owning an annuity. If these drawbacks are significant given your goals and circumstances, you may not want to invest as much in an annuity.
When you keep money in a retirement account such as an IRA, you can make withdrawals from the account whenever you want or need. (Doing this before age 59.5 may result in early withdrawal penalties and taxes.) However, once you get an annuity, you lose the ability to access your balance because you’ve used it up. to purchase a series of periodic payments from an insurance company.
So consider how much liquidity you will have with the remaining 50% of your portfolio. Is it enough to cover any unexpected expenses? Are you satisfied with the amount of the remaining balance? If you can answer yes to these questions, you may be able to allocate half of your bill to an annuity. If the answer is no, you might want to rethink it.
If you buy an annuity with money you would otherwise have invested, you are giving up future growth. Once annuity payments begin, they typically remain fixed. A 401(k) or IRA balance, on the other hand, will grow depending on the performance of the investments in your account. That higher balance can translate into higher payments later.
You can usually choose an annuity payout option that leaves a residual benefit to an heir in the form of a lower benefit, such as 50%. However, in general you cannot leave a cash balance. Meanwhile, any money left in your retirement account when you die is left to your heirs.
The more you spend on an annuity, the less you may leave to your heirs. Again, how much this matters to you is a personal decision. Your family and friends may be doing just fine without receiving an inheritance from you, or you may simply not want to leave them much. On the other hand, you may be hoping to leave more as part of your estate, leaving you with less to spend on an annuity.
(But if you need help assessing your estate planning needs and how to structure your finances to meet them, consider seeking out a financial advisor with estate planning expertise.)
How much of your savings you should spend on an annuity is different for everyone. If you need more guaranteed income, are a conservative investor, or aren’t concerned about leaving money to heirs, it may make sense to put more of your savings into an annuity.
To the extent that these ideas don’t appeal to you, it’s probably a better idea to keep more of your money outside of annuities. Hopefully your advisor has explained the reason why they suggested the amount. If not, you have every reason to ask. It is a fundamental part of the advisor-client relationship.
There is a lot to consider when finding a financial advisor. You want to work with someone who provides the specialized services you need, such as education planning or alternative investment management. You will also want to find someone who clearly communicates how their fees work and how much you will pay for their services. Also look at the legal and regulatory history of the advisor and/or their firm. Disclosures on an advisor’s file can be an important warning sign, but not always. To help you navigate this process, we’ve created a comprehensive guide on how to find and choose a financial advisor.
Finding a financial advisor does not have to be difficult. SmartAsset’s free tool matches you with up to three vetted financial advisors serving your area, and you can have a free introductory meeting with your advisors to decide which one you think is right for you. If you’re ready to find an advisor who can help you achieve your financial goals, get started now.
Have an emergency fund on hand in case you encounter unexpected expenses. An emergency fund should be liquid – in an account that is not at risk of significant fluctuations like the stock market. The trade-off is that the value of liquid cash can be eroded by inflation. But with a high-interest account, you can earn compound interest. Compare savings accounts from these banks.
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Brandon Renfro, CFP®, is a financial planning columnist at SmartAsset, answering reader questions about personal finance and tax topics. Do you have a question that you would like answered? Email AskAnAdvisor@smartasset.com and your question may be answered in a future column.
Please note: Brandon is not a participant in SmartAdvisor AMP nor an employee of SmartAsset, and he received compensation for this article.
