When an Annuity Makes Sense: A Real-Life Example with Andy Panko
For today’s blog, I will recap a conversation that I recently had with Andy Panko on my podcast, Retire With Ryan. Andy is a CFP®, RICP®, EA, and President of Tenon Financial. Together, we cut through the confusion and explore when an annuity might be the right fit for your retirement strategy.
As our readers know, I tend to land on the side of skepticism when it comes to annuities. However, there are a lot of valid reasons for and against them, and today we’ll talk about the good reasons why an annuity might make sense for some individuals.
UNDERSTAND THE CLIENTS NEEDS
The first step is always understanding the client, what their goals are, and how comfortable they are taking certain risks to achieve them.
The client Andy worked with was in her early 60s and wanted a reliable monthly income to cover basic expenses. After discussing her overall financial situation and looking at the other investments she had in traditional securities, they focused on a simple solution: $600 a month for as long as she lives, with something left over for her beneficiaries if she passes away unexpectedly.
She had no reason to believe she would live particularly long or short, so Andy used standard life expectancy assumptions for the analysis. The key here was ensuring she could rely on that $600 monthly income for the rest of her life, with a death benefit to protect her beneficiaries.
FINDING THE RIGHT ANNUITY
Even though Andy doesn't sell annuities, he wanted to make sure he helped his client find the best value. To do this, he turned to publicly available resources like ImmediateAnnuities.com, which allows you to shop for annuities without any commitment or hidden contact requirements. He was able to quickly see a range of prices for single-premium immediate annuities (SPIAs) with a cash refund option.
From his research, he found that the cost to purchase the $600/month income ranged between $107,000 and $120,000, depending on the insurer and the terms. This gave them a solid starting point.
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LOOKING BEYOND THE STANDARD QUOTES
Next, he expanded the search to other independent platforms, like RetireOne, which offers annuity quotes from providers that may not be listed on more general websites. These resources can sometimes yield better rates or more tailored products, so he thought it was worth checking.
At the same time, he reached out to a few agents, so he could tap into the expertise of people who have relationships with insurance carriers not featured on public sites. The goal was to gather as many quotes as possible to ensure she was getting the best deal.
WHY NOT CONTACT AN ANNUITY AGENT?
You're probably wondering why he didn't just refer the client to an annuity agent directly. There’s a reason: as a fee-only advisor, we want to shield our clients from potential conflicts of interest. Often, annuity agents will push products like variable annuities, which can come with high fees and complex terms. That’s not the kind of solution his client was looking for — and it’s certainly not in her best interest.
By doing the research and working with other agents to source additional quotes, he was able to protect her from these potential pitfalls and ensure she had a clearer view of her options.
CHOOSING THE BEST OPTION
After Andy had done some research, he reached out to an agent recommended by someone he trusted in the industry. This agent proposed a different type of annuity: a Fixed Indexed Annuity (FIA) with a Guaranteed Withdrawal Rider.
While this solution wasn't identical to the traditional SPIA, it presented a very appealing alternative. Instead of locking up the entire lump sum in an immediate annuity, the fixed-indexed annuity offered some flexibility and growth potential based on the performance of an index, in this case, the S&P 500.
The Fixed Indexed Annuity cost $102,000 in initial premium, and the Guaranteed Withdrawal Rider ensured that the client would receive $600 per month for life, just as desired. In fact, this solution was $5,000 less than the SPIA we had initially looked at.
HOW DO FIXED-INDEXED ANNUITIES WORK?
In a fixed-indexed annuity, the value of the contract grows based on the performance of an index, such as the S&P 500. The insurer credits the account based on the index's returns, with a cap on how much you can earn (e.g., 10%). If the index goes up by 20%, you would still only earn the capped rate of 10%.
Conversely, if the index drops by 20%, the value of the account stays flat. However, the key difference here is that you’re not exposed to the risk of losing principal — you only gain or break even based on market performance.
The Guaranteed Withdrawal Rider ensures that the client can receive their $600 per month, even if the market underperforms. This rider comes at an additional cost (around 1.2% annually), but it's a small price to pay for the certainty of guaranteed income.
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POTENTIAL TRADE-OFFS
The primary difference between this Fixed Indexed Annuity and a traditional SPIA is that the latter offers a cash refund feature, which ensures that if the client dies early, the remaining contract value is returned to their beneficiaries. The Fixed Indexed Annuity, on the other hand, has a more variable value, depending on the performance of the index.
However, the client was comfortable with this trade-off. They understood that, if they passed away early, the amount left for their heirs might be lower than with a SPIA, but they were okay with the potential variability. They just wanted to ensure that their family would receive something if they didn't live to an old age.
INFLATION AND INCOME ADJUSTMENTS
One crucial question that often arises with annuities is inflation protection. Unfortunately, this particular Fixed Indexed Annuity did not include any adjustments for inflation. The $600 per month would remain fixed throughout the client’s life.
However, the client had other assets—like equities—that she could rely on for inflation protection. For most people, the combination of Social Security and a diversified investment portfolio can serve as an adequate hedge against inflation.
Some annuities do offer inflation riders, but they come at a cost. Adding an inflation rider could increase the initial premium or decrease the initial monthly payout. This option was deemed unnecessary in this case because the client had other resources to manage inflation.
THE MATH BEHIND THE NUMBERS
To better understand the cost and benefits of this annuity, we looked at the payout rate, which was 7.2% on the initial premium of $102,000. While this is a solid payout rate, it’s essential to understand that the return on an annuity isn’t the same as traditional investments like stocks or bonds. Part of the $600 per month is simply returning the principal (the $102,000) over time. The actual return, or interest component, would be closer to a 5% internal rate of return, assuming the client lives to their average life expectancy.
It’s crucial to calculate the internal rate of return (IRR) to compare annuities with traditional investment options. For example, a simple U.S. Treasury bond might offer around 4% in interest, but it doesn’t provide a guarantee of monthly income for life. An annuity, on the other hand, offers the safety and certainty of knowing exactly how much you’ll get each month.
WHEN IS AN ANNUITY THE RIGHT CHOICE?
Ultimately, annuities are an excellent solution for people who need guaranteed income and are comfortable with a fixed or somewhat variable income stream.
The client in this case wasn’t concerned with growth or high returns but rather wanted to ensure a steady income stream for the rest of their life. Annuities, when properly selected and understood, can be a vital part of a retirement strategy.
FINAL THOUGHTS
While annuities can get a bad rap due to confusion and misinformation, when used appropriately, they can be a fantastic financial product.
If your goal is guaranteed income, an annuity can provide that with varying degrees of flexibility and growth potential. It’s all about understanding what you want, what you’re willing to pay for, and choosing the right product that fits your needs.
If you're considering annuities, take the time to learn the ins and outs of the different options available, and work with a trusted financial advisor who can guide you toward a solution that's best for you.
If you have a question or topic you’d like considered for a future episode/blog post, you can request it by going to www.retirewithryan.com and clicking on "Ask a Question."
As always, have a great day, a better week, and I look forward to connecting with you in the next blog post, podcast, YouTube video, or wherever we have the pleasure of connecting!
Written by Ryan Morrissey CFP®, CLU®, CHFC®, CMFC
Founder & Principal Wealth Advisor of Morrissey Wealth Management
Host of the Retire with Ryan Podcast
