Traditional Retirement Planning and Annuities

It’s hard to live in this great town of Falmouth and not appreciate old traditions. Aside from our city’s historical significance, we have our own local traditions too. Take Ghelfi’s Candy on Main Street, they’ve been making the best home-made chocolates and dishing out creamy ice cream for over thirty-five years. And then there’s the Falmouth Road Race each summer, and my kids used to love Santa stepping off the boat at Falmouth harbor at Christmas. 

So, just last week, after grabbing my favorite heath-bar candy from Ghelfi, I bumped into an acquaintance of mine while walking down Main Street, I will call him Ted.  With both of us mask-less, we started off talking about the “re-opening” of Falmouth post-pandemic and our anticipation of being able to enjoy these pastimes again. After essentially being in a state of lockdown for the last year or more, we look forward to getting back to a semblance of normal.

Our conversation quickly turned to . . . retirement planning.  You see, Ted is about 10 years away from his planned retirement date and wants to ensure his retirement system is well positioned to support his expenses in retirement. I remarked to him that some traditional strategies used to accumulate his wealth in the past may be inappropriate as he prepares for his distribution years.  We just might need to consider new approaches to managing our retirement dollars. 

One area in particular pertains to how we allocate our dollars for both growth and protection. Take the Rule of 100. This is an old brokerage model rule-of-thumb in the financial planning world that’s based on a couple of key concepts – that equities have higher potential return, but also higher potential risk, than fixed income, and the younger you are, the greater your ability to take on risk and recover from market downturns. Thus, the older you are — and the closer you are needing to use your money in retirement — the less risk you should take. The rule suggests that you should subtract your age from 100, and the result is the maximum percentage amount you should have invested in risk-based investments.

This means that as you age and get closer to retirement, you dial down your equity allocation as you move money to fixed income as part of a downside risk mitigation system. Keep in mind, the Rule of 100 has its limitations and is not an exact science, but it helps guide us towards the right investment mindset and outcomes. 

Often, when people approach retirement and want to protect a greater portion of their assets for income, they often choose bonds, which are considered members of the “fixed income” class. But new thinking suggests that annuities may work just as well, or even better in some cases. Both bonds and annuities can create a steady stream of income, but there are trade-offs with each. And because different types of bonds and annuities exist, it’s hard to make a broad comparison between the two financial strategies. Although annuities and bonds share some common elements, they are structured to achieve different outcomes.

Bonds provide interest (via coupon payments) and then return your principal when they mature. And once you use all of your principal for income, it’s gone for good. Annuity payments on the other hand are a combination of interest and principal, making each individual annuity payment higher than a bond’s coupon but with no principal repayment at the end. And while annuities are less liquid, they do provide a level of premium protection not found in bonds. As interest rates fluctuate, the market value of bonds tends to move in the opposite direction, whereas basic fixed annuities don’t fluctuate along with equity markets. 

Right now, some fixed and fixed-indexed annuities make an attractive alternative to both bonds and CDs in a portfolio, due to the principal guarantees and interest rates offered. Now I’m not suggesting that fixed and fixed-indexed annuities are for everyone. Even if the product fits your needs well, you will likely always want to maintain assets in other types of investments, like CDs, bonds or stocks. Annuities have surrender charge periods, too, which means that you will pay a penalty if you need access to all of these funds in the early years of the contract.

But today’s low interest rate environment might make annuities even more attractive than bonds. While annuity payouts have dropped because of low rates, alternative strategies such as bond ladders—a portfolio of bonds that mature on different dates—have been hit harder.

So, let’s say you’ve done your research and have decided that an annuity is a good fit for you. How much should you allocate towards this income-producing asset? Well, it should be no surprise that the answer is, “it depends”. As with any investment decision, it depends on your personal circumstances. 

However, those without sufficient dependable income could run out of money sooner without having annuities. “You absolutely need to cover your fixed expenses with income that will last for the rest of your life,” says Dr. Milevsky, a finance professor at York University in Toronto. “That’s the floor.”

So as you near retirement, take a look at your approach. Do you have a downside risk mitigation system in place? Shouldn’t you?  If so, does it rely on traditional allocation strategies, or could an annuity offer a more solid foundation? While some traditions stand the test of time, this isn’t necessarily the case for retirement planning in a rapidly changing financial world, so I encourage you to keep an open mind to some new ideas!

As we enter into Memorial Day weekend, please take a moment to reflect on those that sacrificed it all so we could have so much.

And as always – be vigilant and stay alert, because you deserve more!

Jeff Cutter, CPA/PFS is President of Cutter Financial Group, LLC, an SEC Registered Investment Advisor with offices in Falmouth, Duxbury, Mansfield. Jeff can be reached at 

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