I’m a Financial Planning Expert: 3 Reasons Multiple Retirement Annuities May Benefit You
Written by
Jake Safane
Edited by
Amber Barkley
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Retirement can be one of the most rewarding periods of your life, but if you have financial insecurity, retirement can feel stressful. One way that some people try to reduce risk and enjoy retirement more is by purchasing annuities.
Annuities are products from insurance companies — purchasing the annuity binds the insurer to make payments to you, based on the terms of the annuity.
But you don’t have to just purchase one annuity. Some turn your retirement savings into immediate fixed payments for the rest of your life. Others might involve locking up your principal for a given period, letting it grow, and then making payments or allowing you to withdraw some of the proceeds.
Here, Kelly Gilbert, owner and principal fiduciary at EFG Financial, shares some of the top reasons why you might purchase multiple retirement annuities.
You’re Rolling Over Funds From Different Jobs
When many people change jobs, they take the money they put into a workplace retirement plan with them. While you could rollover all the funds from, say, your 401(k) into an individual retirement account (IRA), some people prefer to put some of that money into annuities, explained Gilbert.
And because people often change jobs more than once, that often means they’re buying different annuities at different times.
“The money comes to them in time intervals every time they change jobs. So when they change jobs, they’ll do a rollover, and they’ll do a part of that rollover into an annuity, and the other part they’ll put maybe into stocks and bonds,” he said.
You Want To Diversify by Laddering Annuities
Another common reason to buy multiple annuities is to diversify through a practice known as laddering. This involves purchasing annuities with different features at different times, explained Gilbert.
For example, during a given year, annuities might offer 5% guaranteed returns. Another year they might offer 3% guaranteed returns, he said. So, by purchasing different annuities at different times, you can reduce the risk of locking in a low overall rate.
You can also ladder when you’ll receive annuity payments. For example, you might buy an annuity that starts making payments immediately, while also putting money into another annuity that has a tax-deferred growth period. After several years, he said, you might then start drawing income from that other annuity. So, you’re getting the benefit of some income now and potentially more income later.
Essentially, you’re mixing and matching the benefits and features of different annuities, rather than going all in on one. Still, different types of annuities have varying pros and cons, so not everyone wants to do all the work that goes into choosing different annuities.
“Laddering of annuities can get as simple or as complex as you want,” said Gilbert.
You Want To Take Advantage of Annuity Bonuses
To entice people to buy annuities, some providers offer what are essentially sign-up bonuses. You might find a 10% bonus, for example, where you put in $100,000, and on day one, your balance is $110,000, said Gilbert.
“A lot of annuity providers are coming out with a brand new annuity that has a new feature, and they’re trying to really entice people to come to them. It’s kind of like a sales incentive,” he added.
So, you might end up buying multiple annuities based on finding attractive sign-up bonuses with different providers. This approach could also be used to effectively lower your tax rate on a Roth IRA conversion, explained Gilbert.
The math can get tricky though, so carefully consider what this type of maneuver would involve and perhaps consult with a trusted tax or financial advisor.
Choosing Annuities
For that matter, you probably want to keep a healthy dose of skepticism before buying any annuity and make sure you fully understand the terms, including areas such as penalties for early withdrawals and investment fees, along with factors such as tax implications. Seemingly small differences between different types of annuities can make a big difference in the end results.
When he got involved with helping clients pick annuities over 20 years ago, “I think we might have had 100 or 200 to choose from,” said Gilbert. “Now, there are thousands of different annuities to choose from.”
“And it’s buyer beware, because you’re signing a contract,” he added. “Don’t go into this thinking, ‘They’re all pretty much the same, so I’m just gonna sign up for that one.’ They’re not.”
In fact, Gilbert shared that around 15 years ago, he missed a small tweak in a contract from a provider that seemed to be pushing a good annuity, and he temporarily had one of his clients go forward with it before realizing the mistake and moving his client’s money out.
So, while there are some good reasons to buy multiple retirement annuities, don’t rush into these decisions. “Educate yourself before you sign a contract like an annuity,” said Gilbert.
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