A question I get asked often is, what percentage of your portfolio should be in annuities? Really good question but there are no perfect answers. And if anyone's giving you a percentage, they have no clue what they're talking about.
Hang in there because I'm going to dig into how this all got started, how people start talking about percentages of your portfolio and asset allocation. I'm also going to talk about what the annuity companies actually think about that and the laws in place to protect you, the customer, the client.
All right. So the question is, what's the percentage of annuities you need in a portfolio? Now, it could be zero, right? You might not need any type of annuity. Annuities are transfer risk products, and there's a lot of you out there that don't even need to transfer risk. So how do I determine that with my clients? Two very simple questions. The first one is, what do you want the money to contractually do? And then when do you want those contractual guarantees to start? So answer those questions, write those down, or put them in the back of your head.
The other thing that I tell people is there's an acronym called PILL. P stands for principal protection. I stands for income for life. L stands for legacy and the other L stands for long-term care. If you don't need to solve for one or more of those problems, then you don't need to buy an annuity.
But anyway, here's how this all started. Before the Stan, The Annuity Man, I was in the securities industry. I worked for all the big firms, and they would say stuff like if you're 60 years old, you need 60% in equities and 40% in bonds. They called it the napkin presentation, where you just kind of drew it out on a napkin. I'm not kidding. Or they'd flip it. They'd say you need 40% in equities and 60% in bonds. There's still a lot of old school guys out there that still use that basic premise on how to allocate stocks and bonds, et cetera.
The annuity industry, feels comfortable with around a maximum of 50% of your investible assets in annuities. Seriously. That's what they say. For example there was a lady who called me, she'd literally watched one of these YouTube videos and says, "I think I need an immediate annuity for lifetime income stream." And I said, "Fine, let's run the quote. Give me a little bit of background about what you have. What's your investible assets?" She was not working. She rented apartment, which is fine. She had $150,000 to her name, period. She had no debt and she wanted to put all $150,000 into an immediate annuity. Now on surface, that makes sense because she needed income. She needed a lifetime income stream. She had no beneficiaries, perfect. But I told her, I said, "Unfortunately, the annuity industry is not going to allow that. They're not going to allow you to put all your money in." So, in essence of her 150, we could only run a quote for $75,000. She was not happy. She's like, "Well then I'll just buy it from someone else." I'm like, "That's fine. But the only way that application is going to go through is if someone fictitiously fills in your application to reflect the 150 being half of your investible assets." They do this for a reason.
Over a decade ago, there's lots of lawsuits from consumers that they put all their money into annuities and they sued the carriers for allowing them to do that. There wasn't anything wrong with the annuities, they were just in fixed annuities. Since then, the annuity industry itself and the carriers have put some things in place from an application standpoint, suitability and appropriateness to protect you, the client.
So, what percentage of your portfolio needs to be in annuities? I don't know that without talking to you first and having a conversation about what type of transfer risk annuities benefit you the most.
Never forget to live in the reality, not the dream with annuities and contractual guarantees! You can use our calculators, get all six of my books for free, and most importantly book a call with me so we can discuss what works best for your specific situation.