Is An Annuity Better Than A Pension
Loaded Questions on Pensions
Question of the day: is an annuity better than a pension? Tough question, loaded question. I will have to break that question down just like your English teacher broke down sentences. Is an annuity better than a pension because it's a bit broader? It always is in the annuity world. You need to know many more details.
Is an annuity better than a pension? First of all, you can't say the word annuity. It's like saying the word trucks, or saying the word restaurant, saying the word shoes. An annuity can be many different types. So people are like, "I hate all annuities." Really? You hate your social security? Of course you don't. An annuity can mean principle protection, or lifetime income. An annuity can mean solving for long-term care. An annuity can mean solving for legacy. There are many annuity types. Single Premium Immediate Annuities, Deferred Income Annuities, Qualified Longevity Annuity Contracts, Multi-Year Guarantee Annuities, Fixed Index Annuities, charitable gift annuities, and variable annuities. I could keep going, but I ran out of breath. The point is annuity means a lot of things.
Pensions Are Annuities
So is an annuity better than a pension? Well, a pension is an annuity. Here's where I'm starting to diagram the sentence right here. A pension is an annuity. Single Premium Immediate Annuities, Deferred Income Annuities, Qualified Longevity Annuity Contracts, and income riders are pension-guaranteed lifetime income products. So those annuity types are pensions. So is an annuity better than a pension? One in the same with those four. Is an annuity better than a pension? If you need principal protection, yeah or yes, formally. Because an annuity can provide principal protection, so you don't lose any money. You just get an interest rate, et cetera. If you answer the two questions, what do you want the money to do contractually? And when do you want those contractual guarantees to start? And your answer was I don't need income. I need principal protection.
What's the Goal?
Well, it's better than a pension because you can get principal protection with certain annuities. So the question that I get, and I get this all the time, should I do an annuity or a pension? An annuity is a pension. What's the goal of the asset? Just when you start thinking about annuities, and not many people, wake up in the morning thinking about annuities. Still, with 10,000 baby boomers hitting the age of 65 every single day, many are thinking about guarantees and annuity types. They're transfer of contractual risk guarantees. Now I have an easy-to-understand and remember acronym. It's PILL. P stands for principal protection, I stands for income for life, L stands for legacy, and L stands for long-term care, confinement care.
'An annuity doesn't have to be a pension. It comes down to what you want the money to do.'
Principal protection, income for life, legacy, long-term care, confinement care. If you do not need to solve contractually for one or more of those items in that PILL acronym, you do not need an annuity. You do not need an annuity if you're looking for market growth. I know that's not what you hear at the bad chicken dinner seminars and some of these crazy things you see on the internet. And some of the ads like "Check out our 11.8% return on annuities." I covered that in a recent video and had to get counseling afterward because I went into this dark hole of depression because of the fraudulent nature of those ads. It's ridiculous. So you can't answer the question, is an annuity better than a pension? The question that you can answer is, what do you want the money to do? What's the goal of the asset? If it's lifetime income, let's shop for a lifetime income. What's lifetime income? It's a pension.
What's social security? It's a pension. Is an annuity better than a pension? An annuity is a pension of some type. But with some types of annuities, you can protect the principle, and they're not income products. The other thing that I want you to put in the back of your head and bring it out when you need it is that many people say I never bought an annuity because when I die, an insurance company keeps the money. Why would I ever do that, Stan? And if you're saying that, yeah, Stan, you're pointing at the screen right now, you're wrong. Slow down because you can structure the lifetime income pension payment so that 100% of unused money when your leer jet hits the mountain will go to your beneficiaries even though the annuity companies are on the hook to pay as long as you breathe.
Only you can decide what you're trying to do with the money and what the goal is with the money. Let’s shop all carriers for the highest contractual guarantee if it’s a pension. Buying annuities of any type is like buying a plane ticket. You have to shop all carriers for the highest contractual guarantee.
So let's take an example. I got a call the other day, and the person wanted to put in a pension guarantee using annuity and annuity types. And there are four different lifetime income types, SPIAs, Single Premium Immediate Annuities, DIAs, Deferred Income Annuities, QLAC, and Qualified Longevity Annuity Contracts. And then there's, it's not an annuity, but an attachment to an annuity called an income rider, which is also a pension guarantee. And the question was, which one of those lifetime income guarantees gives me the most control?
I want to control the asset. I do not want to give up any control. I do not want to annuitize. Annuitize is when you rip the knob off the water faucet, and the water just flows. In this case, annuitization, SPIAs, DIAs, and QLAC that's annuitization. The income's going to flow. It's going to flow. There's no off switch. The off switch is death, and that's not a good strategy, by the way. So the answer to this gentleman's question was, you're a control freak. You want a lifetime income stream. You want to control it from start to finish. Income riders give you the most control, even though it's a guaranteed lifetime income pension as long as you breathe.
That doesn't make income riders better than immediate annuities, Deferred Income Annuities, or Qualified Longevity Annuity Contracts. But the specific question was which one gives you the most control? It's income riders. Now income riders can be attached to variable annuities at the time of application, or indexed annuities at the time of application. And in some cases, Multi-Year Guarantee Annuities at the time of application.
Let me do a basic visual if you draw a line down a blank sheet of paper. Accumulation value. This is my left-hand side, your right-hand side. With variable annuities, that's the mutual fund, separate accounts. With index annuities, that's the call option. In MYGAs, that's the interest rate. On this side is the income rider. Once again, draw a line down a blank sheet of paper.
This site, my right, you're left, is the income rider. It's the contractually guaranteed lifetime income pension amount that you can turn on whenever you want to turn it on. You can turn it on in one year, immediately, ten years, or seven years. And one of the things I'm going to ask you as we get deeper into the income rider discussion, if that's what you want, if you want to control that asset yet have a pension, is what's the projected time you're going to turn on that income stream? And based on that answer, we’ll shop all carriers for the highest contractual guarantee. If you give me a range, if you say, I don't know, it's between five and seven years, we'll quote five-year, six-year, and seven-year deferral, and then choose an income rider that's competitive in all three of those tranches.
Controlling the Income
But the bottom line is that you can control that income rider guarantee, that pension guarantee. Let me give you an example. If you bought an indexed annuity, a great and efficient and cost-effective delivery system for an income rider for future pension income needs, and you bought it and say, ten years later, you didn't need the income rider. You don't need the lifetime income stream. Then you can get all your money back if it's a ten-year surrender charge type product. With an indexed annuity, you can get the accumulation value back. That's called controlling the asset. Lifetime income doesn't always mean irrevocable; irrevocable isn't bad, but you can get a lifetime income stream and have full control. It's called an income rider.
Never forget to live in 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.