Tom Hegna: The Anti-Annuity Dominos Have Fallen

I have been an annuity believer for 30 years. The research of leading PhDs, specifically on the power of income annuities in retirement, is overwhelming.

by Tom Hegna

You really must cover your basic living expenses in retirement with some form of guaranteed lifetime income – Social Security, pensions and annuities.  The problem is that the general public doesn’t read white papers published by these leading PhDs.  They get their information from TV talking heads and their buddies at the coffee shop.

If you ever have presented an annuity solution to a client or prospect, you have probably heard the reasons why they didn’t think an annuity was the best solution. They say things such as, “I don’t need an annuity,” “My rental property is my annuity,” “My laddered bond portfolio is my annuity.”  Or “Why buy an annuity when my dividend-paying stocks increase their dividends over time?”  Or,“I am a big believer in tax-free municipal bonds.”

I want to be clear, I am not against any of these strategies to supplement a retirement. But they should not be used to cover basic living expenses in retirement.

If we have learned anything during the COVID-19 crisis, we have seen firsthand why these alternate strategies are suboptimal. Let’s look at each of them more closely.

“My Rental Property Is My Annuity”

How is that working out? Not very well when renters don’t have to pay rent and landlords cannot evict them.  CNBC had the headline “Small landlords struggle as renters either can’t or choose not to pay amid coronavirus layoffs.”

There are 8 million individual landlords who own between one and 10 rental properties. These mom-and-pop landlords “have neither the cash nor the credit availability to cover their costs when the rents aren’t paid.”  The New York Times wrote “40% Of New York Tenants May Not Pay Rent This Month. What Happens Then?” This is happening all over the country, and many landlords who count on that rent for cash flow or to cover the mortgage on their property are going to be in big trouble.

Compare that uncertainty with the certainty of a lifetime income annuity.  The checks come every single month. You don’t have to worry about property damage or vacancies. No roof or air conditioner to replace. When you think about it, an income annuity might be the best rental property you could own!

“I Believe In Laddered Bonds”

Although I have never been a fan of laddered bonds, you could argue that they did make sense when bonds were paying 8% or 10%. That is not the case today. The 10-year Treasury bond is paying less than 0.75%. Even the 30-year government bond is less than 1.5%.

With rates this low, why would you do that when you could get a 5%, 6%, 8%, even 10% per year guaranteed payout (depending on your age) from an income annuity? All of the bond interest is taxable while the income annuity has an exclusion ratio since the principal is not taxed when received.  This can be a significant tax break for retirees.  Obviously, if qualified money is used, all income is taxed regardless of the investment vehicle used.

“Dividend-Paying Stocks Will Beat An Annuity”

Well, maybe. But hundreds of companies have slashed or eliminated dividends due to the COVID-19 crisis.  More will be cutting in the future.  And we are not talking “bad companies.” We’re talking about companies such as General Motors, Dunkin, Royal Dutch Shell, Harley Davidson, Expedia – the list goes on and on, with more to come.

I am not against dividend-paying stocks; I use that strategy for a portion of my portfolio.  But don’t think for a minute that these dividends can be counted on to cover your basic expenses in retirement. Had all Americans believed in that strategy, a lot of them would be unable to pay their mortgage or cover any other basic living expenses.

“I Use Tax-Free Municipal Bonds”

I have no problem with tax-free income in retirement. For me, it’s Roth IRAs and cash value life insurance. But many people are fans of municipal bonds.

I think Barron’s has done some of the best research here. In fact, their Aug. 31 issue put it on the cover:  “The Trillion Dollar Hole – Trouble Ahead For Municipal Bonds”  The shutdown has severely reduced state and local revenue.  Meanwhile their expenses due to COVID-19 have soared.  Now, not all municipal bonds will be in trouble but there will be some unexpected defaults.  Again, these will hurt those retirees who were counting on what they thought was reliable tax-free income.

There is a difference between a retirement paycheck and a retirement playcheck.  Guaranteed lifetime income should be used for the paycheck.  All of those other investments are fine to use as the playcheck. We all get one chance to get retirement right. Following these very simple steps can help people have a happy and successful retirement:

  1. Have a plan and work with a competent financial advisor.
  2. Understand and maximize your Social Security benefits.
  3. Consider a hybrid retirement. Working just a couple of extra years can have a huge, positive impact.
  4. Have a plan to protect yourself from inflation. Stocks and real estate fit here.
  5. Cover your basic living expenses with guaranteed lifetime income. The annuity fits here.
  6. Have a plan for long-term care.
  7. Use your home equity wisely

And use life insurance as the most efficient way to transfer wealth to children, grandchildren and charities.

Retirement doesn’t have to be confusing. These are simple steps, based in math and science, that can help retirees live an optimal retirement.

Tom Hegna is an author, retirement expert and economist. He has written five books on retirement and had a PBS-TV special “Don’t Worry, Retire Happy” that played in more than 80 million homes in the U.S. and Canada. Tom may be contacted at