Social Security, Pensions and Annuities

Social Security, Pensions and Annuities

February 28, 2014 – For years, many “experts” in the financial advice-giving business have cautioned clients to shy away from annuities when it comes time to getting serious about retirement planning.

Setting aside the possibility that this bias against annuities may have more to do with lack of education or a personal financial self-interest that lies elsewhere than a true dislike of annuities, one is left to wonder:


Why can’t annuities and traditional investing coexist?

Well, it turns out they can.  And we believe they should.

Which makes “Breaking the 4% rule,” a white paper unveiled a few months ago by J.P Morgan Asset Management, so special.

Here are a few reasons why you may wish to take this paper very seriously:

It represents a break from the past – For many years, economic conditions and the mean age of Americans supported the 4% withdrawal approach to retirement planning.  But with baby boomers heading for the exits en masse over the coming decade and economic confidence iffy, strategies must adapt.

Its focus on Decumulation, not Accumulation – The mindset required for successful nest egg building is fundamentally different than the one needed when it comes time to preserve and draw down the retirement funds acquired over a career.

It actually embraces annuities – Honest!  Well, “embraces” may be a bit strong since you actually have to look for it.  “Recognizes the importance of” may have been a better choice of words.  But it is there and its inclusion speaks volumes.

We’re actually OK with the fact that the importance of annuities as part of one’s overall financial plan wasn’t placed front and center in this particular paper.  It was, after all, produced by J.P. Morgan Asset Management (emphasis added).

“. . . retirees with little or no lifetime income have a greater risk of poorer outcomes later in retirement than retirees with higher levels of lifetime income.”

But the J.P Morgan Dynamic Retirement Income Withdrawal Strategy which serves as the cornerstone of their paper, specifically considers lifetime income as one of their five key factors in achieving optimum retirement success.

“Greater lifetime income, from sources such as Social Security, pensions and lifetime annuities allows retirees to increase both their withdrawal rates and equity allocations.”

While the paper is a good read, we’re guessing most of you are less interested in analyzing formulae better suited for the set of Good Will Hunting than you are hearing about the highlights.

“Wealthier retirees should be more conservative in their asset allocation, with larger fixed income allocations.”

So we took the liberty of interspersing some of our favorite passages between the paragraphs above even if some of the conclusions seem a bit obvious.

A baby step maybe.

But J.P. Morgan’s apparent acceptance of the important role lifetime annuities, along with Social Security and pensions, play in addressing the longevity risk everyone faces, could signal a changing attitude toward this proven retirement security blanket.

We hope so.  Because we really think these doggone annuity things are the cat’s pajamas and deserve a place in everyone’s retirement strategy conversation.

(NOTE:  The Finn Financial Group does not provide investment advice and is not affiliated with J.P. Morgan)


Finn Financial Group