Where Can I Find Reliable Income In Retirement?

A Lesson About Annuities From Hurricane Sandy

Written by Hersh Stern Updated Saturday, February 11, 2017

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It’s been years since Hurricane Sandy barreled into the east coast, devastating some areas that had remained pretty much unscathed for decades. Like most of our neighbors (here in New Jersey), my wife and I stocked up, stayed home, and rode out the storm.

As Hurricane Sandy approached, our confidence was tested by Category 4 winds with gusts that approached 140 mph. And while our home was built to withstand winds of up to 200 mph, we could feel the walls shake throughout the night.

We even heard (and later found) pieces of our neighbor's tile roof break away and smash just a few feet from our dining room bay window. When the skies finally cleared, it revealed downed power lines, broken trees, and damage to nearly every home in our neighborhood. It was months before things were back to normal.

Peace at last or calm before the storm?

The hurricane season comes and goes in central New Jersey. It is mostly uneventful, thank goodness. But none of us have forgotten Sandy. While it may have been brief and terrifying, the prolonged aftermath was even worse, leaving many families without food, water, and power for weeks and longer.

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So what does Hurricane Sandy have to do with annuities? In my opinion, a lot. Since the great financial storm of 2009, many pundits have signaled an all-clear.

Yes, the stock market retraced its losses. The economy is again growing moderately and inflation continues low. Why then would anyone want to buy a conservative product like an annuity?

That's where my Sandy analogy comes in. The approach I take to income planning is that a well-diversified portfolio should maintain its core holdings in stocks and bonds while including an allocation to annuities for income protection or income "insurance".

Stocks certainly have their place. But when the stock market crashes, like it did in 2009, your standard of living may be threatened. Depending on your age, you simply may not have the luxury of time to wait out a recovery. An annuity can provide some income protection during such a financial storm.

Annuities in academic research

Annuities are not designed to be the most lucrative investments. But they are built to offer an attractive blend of returns and safety that few other financial products can match.

That's why academic researchers agree that an annuity deserves a prominent place in a retirement plan. This simple yet powerful financial instrument often gets overlooked with all the talk about 401(K)’s, the future of Social Security, and the stock market's ups and downs.

Once you set up an annuity you can receive a steady income for life beginning immediately or at a future date that you control. Compare this to managing your investments in retirement, in order to produce an annuity-like income, perhaps with a somewhat higher return, but with a greater risk of loss.

Where does an annuity fit in my retirement portfolio?

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Comments (2)

  1. Rose:
    Apr 06, 2016 at 11:02 AM

    I have an IRA. If I buy an annuity and delay receiving payments for a couple of years would it make a significant difference?

  2. Hersh Stern:
    Apr 06, 2016 at 11:04 AM

    Hi Rose,

    Yes, your quotes should increase from 3% to 6% for every year you delay receiving income. This estimate of by how much your payout amount would increase depends on several factors: the amount of interest the insurance companies earn, how much interest they credit to your premium during the delay period, your age when you start to receive income (and the corresponding life expectancy/mortality estimates at that age), and on the particular payout option you select (a no refund annuity vs. an annuity with a beneficiary refund option).

    May I suggest you create different what-if scenarios at our web site by changing the income state date.

    Hersh