Annuity could ease retirement anxiety

Americans routinely report anxiety about money, particularly middle-aged people. Even though Gallup’s most recent poll on finances was its most optimistic in a while, more than half of American adults reported themselves as either very or moderately worried about not having enough money for retirement.

For many of us, there just isn’t a sure path to a worry-free future. Even what looks simple usually isn’t.

There’s no better example than deciding whether it’s smart to buy an annuity.

In their basic form, retirees “annuitize” their savings by turning over a chunk of money — and the anxiety about how to best invest it — to an insurance company in exchange for collecting a check for the rest of their lives. A sickening slide in the stock market all over the news? Shrug it off. Another check is due, and it will be the same amount as last month’s.

Annuities also can help people with what’s called the drawdown problem, which means how much to safely take out of savings every year to use for living expenses.

The recent rule of thumb is 4 percent of savings per year, but retirees who worry about outliving their money might spend even less. They eat store-brand canned soup and keep the thermostat at 60 degrees all winter for years, only to one day realize they will be leaving an estate they didn’t get to enjoy. An annuity might have let them live a richer life.

But buying an annuity isn’t exactly a worry-free solution. Setting aside their expense, one problem with the traditional annuity is that you might die right away. The life insurance folks have responded to that worry by offering annuity contracts that would give the family some or all of the money back, maybe by continuing payments up through 20 years whether Dad’s still around or not.

Yet annuities don’t seem popular with a lot of financial planners and money managers.

The reason: “You’ve given up your asset. It’s gone,” said Greg Mortenson, a founding partner of Edina, Minn.-based Capstone Advisory Group.

Simply put, people in retirement might have the monthly budget covered through an annuity — but can find themselves with a medical problem Medicare won’t fully cover or a relative in need of help. If most of the savings went to the insurance company, another check might be coming next month but the crisis is today.

Mortenson has also met plenty of people nearing retirement who seem anxious about their finances, even those who seem to have enough.

Part of their problem, he said, is that they are awash in too much information, with round-the-clock headlines on financial markets.

The stock market is near its highs, “but they remember 2000 to 2002 and they certainly remember 2008,” he said, and the brutal bear market in stocks associated with the recession.

His firm’s approach to helping clients worry less is to show them how they can generate income without giving up a big piece of their savings.

He and his colleagues carefully assess how much a client’s family needs per month in retirement and the minimum return they would need to get from their 401(k) accounts and other savings plans.

In most cases clients can see how they can even afford to move some money out of riskier assets like stocks and still generate enough investment gains to cover their monthly needs.

“So we try to assuage some of that fear, by saying, you don’t need all that risk,” he said. “All we need to do is make sure you don’t run out of money.”

Still, when it comes to your money, feel free to worry a little. It’s one of the things that’s kept you alive this long.