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.
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