Filbrandt Reports

To Annuitize or Not to Annuitize?

Volume 17, Issue 5



Executive Summary:

Your retirement does not mean that you are required to take distributions from your university retirement plan.

The process to do so is called annuitization. The decision to annuitize is final and cannot be reversed.

Annuitization can provide a lifetime guaranteed monthly income.

But, when you select an annuity payout from your university retirement plan, you lose:

  • The ability to pass the total retirement account balance to spouse and children.
  • Claim to the total account value in  return for a monthly income payment.

Take enough time to make a sound, confident decision. There is no need to rush.

Recommendation Surprises Professor

Some time ago, a professor friend asked me for some help in selecting a retirement income distribution option. While Fred was not a client at the time, we had discussed his financial situation several times over the years and I was certainly more than willing to help him if I could.

Fred had a sheet of paper with seven possible options in his hand and he had circled the one that gave him and Mary, his wife, the highest monthly payment. It seemed pretty obvious to him that the highest payment would be the best choice, but since I was in the neighborhood he thought he would get my thoughts on his selection. He was going to retire that spring and was anxious to get the paperwork done and off to the insurance company.

I took the list of options from him and we agreed to meet later that afternoon. You can imagine his amazement when I told him in no uncertain terms that he should not take any of the options listed. In addition, I made him aware of the fact that there were other options that he could choose from, that were not listed on the paper. He was dumbfounded. “I have to do something, what should I do?” he asked.

To Annuitize or Not to Annuitize?

Annuitization is Not Required

I explained to him that although he was going to retire in a few months, he did not have to do anything, and he certainly did not have to select one of the seven options provided. You see, although he was retiring, he did not need any distribution of money from his retirement plan. He had saved a significant amount of money in the bank, had some other investment funds, and he and Mary were collecting their social security. He had no mortgage or other debt. He really did not need much more income; certainly not immediately. He had also told me on another occasion that a primary goal of his was to leave a significant amount of his retirement account to his children if at all possible.

What Fred had not understood was that the seven options he was reviewing for distributions from his retirement plan were all annuity options. The primary investment vehicle that all life insurance companies provide under university retirement plans is the annuity. The income projections associated with these annuities are “retirement annuity income projections.” So what is the concern?

What Fred did not know was that once he checked the box selecting an annuity payout, he would no longer have the ability to pass the total balance of his retirement account to Mary and his children. He would forever lose claim to the total account value and in return get a monthly income payment.

Now having an annuity payout option in many situations can be a good thing. Particularly in the low-interest-rate environment we are currently in, an annuity payment will provide a higher monthly income for the retiree.

But Fred did not need more income. He wanted to have flexibility and control over his account balance. In addition, when he learned that all of the annuity options illustrated could not be changed in the future, he was even less enthusiastic as you might imagine.

In the end, he chose an option that was not illustrated; interest only. He simply instructed the insurance company to send him the interest that was earned on his account. This was sufficient for his own immediate needs, and left the principal balance of the account intact to be paid to Mary and the children at his death. If he wanted to change the distribution method in the future, he could do so with no penalty. He could even pick one of the seven annuity options in the future if he thought it made sense.

To Annuitize or Not to Annuitize?

Important Takeaways from Fred’s Experience

  1. The devil’s in the details.   Before checking the box on an important decision like retirement income, get a second opinion from a knowledgeable, independent advisor who is a fiduciary.
  2. Remember that in almost all cases, when an insurance company is illustrating payout options for a university retirement plan, these are retirement annuity income options. Annuity options are neither good nor bad. An annuity payout can be just the right solution in some cases. However, once selected, it cannot be undone. If you are uncertain as to what to do, select an option that can be changed in the future.
  3. If you cannot explain it and do not understand it, then do not do it! Retirement income decisions have a lasting impact on one’s investments and estate transfer goals. Take enough time to make a sound, confident decision. No need to rush.

 

By Michael J. Filbrandt, CLU®, ChFC®            

Chairman of the Board, Filbrandt & Company 

 


Volume 17, Issue 5

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