Should I buy a $3 million annuity to never worry about money again?


Dear Penny,

Please help me rate a tantalizing temptation. I am a 58 year old single gay white male college graduate with no dependents. I have worked hard, prospered, lived frugally and saved for over 30 years. In my early 50s, I was promoted beyond my skills and abilities, and as a result, I floundered professionally.

Currently I am self-employed and own/manage one vacation rental and three single family residential rentals, all debt free. These gross/net rentals of approximately $6,000/$4,000 per month, respectively. Additionally, five RV site rentals bring in between $1,200 and $3,000 per month depending on occupancy.

In addition to the aforementioned $1.4 million in real estate, I saved about $800,000 in qualified retirement accounts.

Soon I will inherit a gift of two $400,000 debt-free homes, which I intend to own/manage as additional rentals that will bring in a monthly total of $4,400.

Oh, and at age 70 (three years past full retirement age), I’ll start getting $3,228 a month from Social Security.

This is where I would like some advice, please. Why shouldn’t I, in a future year, liquidate that $3 million into a no-liability, no-work annuity and just enjoy $15,000 or more per month (plus Social Security) for the rest of my life? Oh the temptation!

– Hardworking and extraordinarily lucky

Robin Hartil [ The Penny Hoarder ]

Dear hard worker,

Annuities are a much maligned financial product, but I will avoid giving you a knee-jerk reaction against them. Much of the bad rap is deserved, but I think they are appropriate in certain circumstances. I’m not sure this is the best option for your particular situation.

An annuity is technically an insurance contract, not an investment – ​​although some annuities have underlying investments. Annuities protect you from the risk of outliving your money by providing guaranteed income, often for life.

Annuities can make sense for someone who is in good health, because the longer you live, the more money the contract will earn you. Sometimes they are a good option for someone with high incomes who are maximizing their retirement accounts since they offer tax advantages. They can also be a decent choice if you’re the type whose blood pressure spikes at any market volatility.

So what’s the case against annuities? For starters, they’re often ridiculously complex, with loads of untransparent fees. Commissions can vary from 1% to 10% of the contract value, depending on the type of annuity.

They are also relatively illiquid. If you buy an annuity and regret it later, you could pay high surrender charges to get your money back in the early years of the contract.

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Inflation is another consideration. If you opt for a fixed payment annuity, your money will buy less each year. You can buy inflation protection for an annuity. But unless inflation stays abnormally high over the long term, chances are you’ll end up paying too much for the option.

My question to you is: When did an annuity become such a “seductive temptation”? Have you dreamed for a long time of cashing in your real estate assets for a guaranteed income? Or have recent events caused you to consider an annuity?

Annuities gain popularity when people worry about a bear market. The second quarter of 2022 saw record annuity sales, according to the Life Insurance Marketing and Resource Association. The previous record? It took place in the fourth quarter of 2008, in the midst of the Great Recession.

If a prolonged recession jeopardizes your retirement, an annuity should be seriously considered. But clearly, you don’t have to worry about running out of money. Also, the fact that you are an entrepreneur suggests that you are not totally risk averse. So make sure you’re not making decisions about your seven-figure nest egg based on short-term market fears.

I cannot give you a definitive answer as to whether an annuity should be part of your retirement plans. But the great thing here is that you don’t need free advice. You can afford to hire a financial planner to assess whether an annuity is appropriate for your goals. Look for a paid financial planner. They will be paid for the services they provide instead of a sales commission.

A financial planner may be able to design a personalized withdrawal strategy that gives you the income you want without too much risk. Dividend-paying stocks and exchange-traded funds (ETFs), real estate investment trusts (REITs), bonds, and certificates of deposit are all good options for investors who want predictable income.

It doesn’t have to be an all-or-nothing decision either. You could estimate your basic retirement expenses and purchase an annuity that will cover those needs. This way, you wouldn’t have to worry about outliving your money, but you wouldn’t have all your money tied up in one product.

Annuity or not, you will obtain the retirement without responsibility and without work of which you dream. Just be sure to explore the alternatives that may prove even more enticing.

• • •

Robin Hartill is a Certified Financial Planner and Senior Writer at The Penny Hoarder. Send your tricky money questions to [email protected].


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