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My advisor recommends putting more than 50% of my portfolio into annuities. What does she tell you?
-Georgia
As with most personal finance decisions, much depends on the specific details of your situation. Fifty percent is probably high for most people, but that doesn’t mean it can’t be the right amount for you. Some may want or need a larger portion of their investment portfolio Pension.
Let’s talk about the reasons why you might want to put that amount into an annuity, and the reasons why someone might not. Compare these elements to your situation, goals, and preferences and decide if 50% is the right amount.
Consider using This free tool To be matched with a financial advisor if you are interested in receiving personalized advice based on your circumstances and goals.
Guaranteed income is the primary reason to buy an annuity. While there Many types of annuitiesInstant annuity is the simplest and most obvious difference. With an instant lifetime annuity, you replace a lump sum of money with a series of regular monthly payments. Much like a pension or Social Security benefit, immediate life annuity payments continue for the rest of your life.
With that in mind, let’s go over some of the key benefits of purchasing an annuity. The more these benefits appeal to you and make sense in the context of your business Financial planThe larger your annuity allocation is.
When you receive income from an annuity, you don’t have to worry about outliving your savings, which is a major concern for many retirees.
When considering how much of your portfolio you want to set aside for an annuity, think specifically about how much guaranteed income you need to cover your living expenses. This is known as the minimum income. This way, if the market is weak and your investments don’t perform well, you can rely on this income limit to succeed.
However, if you have Social security Benefits and/or pension payments already provide enough income to cover your living expenses, and more guaranteed income may not be needed. (But if you need an expert to closely evaluate your retirement income plan, consider this Match with a credit counselor.)
A Fixed pensionAt the same time, it pays a guaranteed interest rate regardless of the performance of the stock market. Once your payments begin, they are not subject to the fluctuations of market fluctuations in this way Stocks, bonds, mutual funds, and ETFs We are.
If you have a very low risk tolerance and don’t want to see your account value fluctuate, annuities can protect you from the emotional uncertainty of a volatile stock market. (And if you need help assessing your risk tolerance and finding investments that match it, Consider working with a financial advisor.)
So what’s too much when it comes to pension investing?
To determine whether it’s appropriate to put 50% of your money in annuities, it’s helpful to consider some of the potential downsides of owning annuities. If these disadvantages are significant given your goals and circumstances, you may not want to invest much in an annuity.
When you keep money in a retirement account such as an IRA, you can make withdrawals from the account whenever you want or need to. (Doing so before age 59 ½ could result in penalties and taxes for early withdrawal.) However, once you pay off, you lose the ability to access your balance since you used it to purchase a series of regular payments from the insurance company.
So, think about how much liquidity you will have with the remaining 50% of your portfolio. Is it enough to cover potential unexpected expenses? Are you comfortable with the amount of remaining balance? If you can answer yes to these questions, it might be a good idea to allocate half of your account to an annuity. If the answer is no, you may want to reconsider.
If you buy an annuity with money that you could have left invested, you are giving up future growth. Once annuity payments begin, they usually remain constant. A 401(k) or IRA On the other hand, the balance will grow depending on the performance of the investments in your account. This higher balance may translate into higher payments in the future.
You can usually choose an annuity payment option that will leave a residual interest to the heir in the form of a reduced payment, such as 50%. However, you generally cannot leave a balance of money. Meanwhile, any money in your retirement account when you die will be left to your heirs.
The more you set aside for an annuity, the less you will leave for your heirs. Again, how important this is to you is a personal decision. Your family and friends may be fine without receiving an inheritance from you or you may simply not want to leave much to them. On the other hand, you may be hoping to leave more as part of your legacy, causing you to set aside less for an annuity.
(But if you need help evaluating your estate planning needs and how to organize your finances to meet those needs, Consider finding a financial advisor With experience in estate planning.)
The amount of your savings you should set aside for an annuity varies from person to person. If you need more guaranteed income, are a conservative investor or aren’t interested in leaving money to heirs, putting more of your savings into an annuity may make sense.
To the extent that these ideas don’t resonate with you, it’s probably a better idea to keep more of your money outside of annuities. Hopefully your advisor has explained the rationale for suggesting the amount they did. If not, you are within reason to ask the question. It is an essential part of the counselor-client relationship.
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Keep an emergency fund on hand in case you encounter unexpected expenses. An emergency fund should be liquid – in an account that is not at risk of significant fluctuations such as the stock market. The trade-off is that the value of liquid cash can be eroded by inflation. But a high-interest account allows you to earn compound interest. Compare savings accounts from these banks.
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Brandon Renfro, CFP®, is a financial planning columnist for SmartAsset and answers reader questions on personal finance and tax topics. Do you have a question you want answered? Email AskAnAdvisor@smartasset.com and your question may be answered in a future column.
Please note that Brandon is not involved in it Smart Advisor &is not an employee of SmartAsset and was compensated for this article.
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