facebook twitter instagram linkedin google youtube vimeo tumblr yelp rss email podcast blog external search brokercheck brokercheck
%POST_TITLE% Thumbnail

Retired Military Finances 101: Do Annuities Ever Make Sense?

Retirement Funding

There is an advisor out there that built a very large firm “hating” annuities. I have a hard time hating just about anything (except some vegetables), but should you hate annuities? I don’t think so. Just like hammer versus a screwdriver, there is a time for any tool.

What is an Annuity?

We should start with a basic definition of an annuity. An annuity is an insurance product. You deposit funds, either a lump sum or over time, into the annuity and earnings are tax deferred. At some point (immediately or in the future) you can start receiving a stream of income that will last as long as the beneficiary does. There are lots of variations and add-ons. You can get a fixed return or a variable return. You can get guarantees on account values (if you take a series of payments) and payments can increase to account for inflation. But for today, we’re going to concentrate on when they might make sense.

You Already Have Some Annuities

If you’re a retired military member, for all practical purposes your military retirement is an annuity. In fact, the FERS Pension (Civil Service) is called an annuity. Social Security is also an annuity. The same is true for any VA Disability benefits. So, whether they make sense or not, you already have at least one. So, do commercial annuities ever make sense?

When Do Annuities Make Sense?

If you are retired military, you already have a lot of annuitized income and there are fewer situations where annuities make. But in some cases even if you are a retired military member, there are times when an annuity makes sense.

  • Guaranteed income sources are not enough. There is some minimum amount of money you need each month in order to live an acceptable life. There are certain expenses you need to pay to live a life with dignity. That amount will vary based on what you consider essential and where you live. But, if your guaranteed income sources (military retirement, Social Security, VA disability) are less than what you need to fund that acceptable lifestyle, an annuity might make sense.
  • After first death income drop is significant. Upon the first death, combined Social Security income will be reduced by 33%, minimum. The military pension will be reduced by 45% to 100% depending on whether the Survivor Benefit Plan (SBP) was selected prior to retirement. Any VA Disability compensation will end. This could leave a surviving spouse with around 50% of the income available prior to death to live on. It is unlikely that expenses will be cut in half. A deferred annuity might be a good solution, if there is a projected shortfall.
  • Your tax bracket now is higher now than it will be in retirement. If you’re already maxing out your employer sponsored plan (401(k), 403(b), TSP) at work and you want to contribute more than you could to a non-deductible IRA, then contributing to an annuity could make sense. This is because you’ll defer taxes on the earnings until such time as your income goes down or you move to a state without an income tax (or both) and you pay less taxes than you would have if you had invested in a taxable account. You need to be careful with this one though, as internal expenses in the annuity could negate a lot of the tax savings.

They’re Complicated

Annuities are really complicated. Make sure you understand everything inside the contract. A independent review by someone other than the agent might be a good idea.

If you found this article useful, you might like the following blog posts:

Retired Military Finances 101: Taxes


What Military Officers Need to Know About TSP and Estate Planning


The Tax Bomb Waiting for Retiring Senior Military Officers




Disclaimer
Please remember that past performance may not be indicative of future results. Different types of investments involve varying degrees of risk, and there can be no assurance that the future performance of any specific investment, investment strategy, or product (including the investments and/or investment strategies recommended or undertaken by C.L. Sheldon & Company, LLC ), or any non-investment related content, made reference to directly or indirectly in this blog will be profitable, equal any corresponding indicated historical performance level(s), be suitable for your portfolio or individual situation, or prove successful. Due to various factors, including changing market conditions and/or applicable laws, the content may no longer be reflective of current opinions or positions. C.L. Sheldon & Company, LLC does not make any representations or warranties as to the accuracy, timeliness, suitability, completeness, or relevance of any information prepared by any unaffiliated third party, whether linked to C.L. Sheldon & Company, LLC website or incorporated herein, and C.L. Sheldon & Company, LLC takes no responsibility therefore. All such information is provided solely for convenience, educational, and informational purposes only and all users thereof should be guided accordingly. Moreover, you should not assume that any discussion or information contained in this blog serves as the receipt of, or as a substitute for, personalized investment advice from C.L. Sheldon & Company, LLC . To the extent that a reader has any questions regarding the applicability of any specific issue discussed above to his/her individual situation, he/she is encouraged to consult with the professional advisor of his/her choosing. C.L. Sheldon & Company, LLC is neither a law firm nor a certified public accounting firm and no portion of the blog content should be construed as legal or accounting advice. A copy of the C.L. Sheldon & Company, LLC ’s current written disclosure statement discussing our advisory services and fees is available for review upon request. DISCLAIMER OF TAX ADVICE: Any discussion contained herein cannot be considered to be tax advice. Actual tax advice would require a detailed and careful analysis of the facts and applicable law, which we expect would be time consuming and costly. We have not made and have not been asked to make that type of analysis in connection with any advice given in this blog post. As a result, we are required to advise you that any Federal tax advice rendered in this blog is not intended or written to be used and cannot be used for the purpose of avoiding penalties that may be imposed by the IRS. In the event you would like us to perform the type of analysis that is necessary for us to provide an opinion, that does not require the above disclaimer, as always, please feel free to contact us.