Should I Buy a $3M Annuity So I Never Worry About Money Again?


Dear Penny,

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

Currently, I am self-employed owning/managing a vacation rental and three single-family residential rentals — all debt-free. These rentals gross/net approximately $6,000/$4,000 monthly, respectively. Additionally, five RV site rentals net between $1,200 and $3,000 monthly depending on occupancy. 

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

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

Oh, and at 70 (three years beyond full retirement age), I’ll start receiving $3,228 monthly in Social Security. 

Here’s where I’d like advice, please. Why should I not, in some future year, liquidate this $3 million into a responsibility-free and work-free annuity and simply enjoy $15,000 or more monthly (plus Social Security) for the rest of my life? Oh, the temptation!

-Hard Working and Extraordinarily Fortunate

Dear Hard Working,

Annuities are a much-maligned financial product, but I’ll avoid giving you the knee-jerk reaction against them. Much of the bad rap is deserved, but I do think they’re appropriate in some circumstances. I’m just not sure it’s the best option for your particular circumstances.

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

Annuities can make sense for someone who’s in good health, since the longer you live, the more money the contract will ultimately pay out. Sometimes, they’re a good option for someone with high earnings who is maxing out their retirement accounts since they come with tax advantages. They can also be a decent choice if you’re the type whose blood pressure skyrockets at any market volatility.

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

They’re also relatively illiquid. If you buy an annuity and later regret it, you could pay a hefty surrender fee to get your money back in the early years of the contract.

Inflation is another consideration. If you opt for an annuity with fixed payments, your money will buy less each year. You can purchase inflation protection for an annuity. But unless inflation remains abnormally high for the long term, there’s a good chance you’d end up overpaying for the option.

My question for you is: When did an annuity become such a “tantalizing temptation”? Have you been dreaming of cashing in your real estate holdings for guaranteed income for a while? Or have recent events led you to ponder an annuity?

Annuities spike in 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 was set in the fourth quarter of 2008, in the midst of the Great Recession.

If a prolonged recession would jeopardize your retirement, an annuity would merit serious consideration. But clearly, you don’t have to worry about running out of money. Moreover, the fact that you’re an entrepreneur suggests that you’re not completely risk-averse. So make sure you’re not making decisions about your seven-figure nest egg based on short-term market fears.

I can’t give you a definitive answer about 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 evaluate whether an annuity is appropriate for your goals. Look for a fee-based financial planner. They’ll get paid for the services they provide instead of a sales commission.

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

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

Annuity or not, you’re going to get the responsibility-free and work-free retirement you crave. Just be sure you explore the alternatives that may prove even more tantalizing.

Robin Hartill is a certified financial planner and a senior writer at The Penny Hoarder. Send your tricky money questions to [email protected].

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