Why a Custom Income-Generating Portfolio May Be Better Than an Annuity in Retirement

When entering retirement, one of the most crucial decisions to make is how to convert your accumulated savings into a reliable income stream. Many retirees consider purchasing an annuity, which provides a guaranteed income for life. However, while annuities offer security, they also come with significant drawbacks, particularly when it comes to preserving wealth for your beneficiaries. 

The Drawbacks of Annuities 

An annuity involves exchanging a lump sum of money for a promise of income over a specified period or for the rest of your life. While this may sound appealing, the primary issue with annuities is that they often die with the policyholder. This means that once you pass away, the income stops, and your initial investment is lost. Your beneficiaries and loved ones receive nothing from the annuity, which can be a significant downside for those looking to leave a financial legacy. 

For example, a client of mine recently approached me with $8 million saved for retirement. She was considering purchasing an annuity to provide her with a steady income. However, after discussing her options, I advised against this approach. By locking her money into an annuity, she would be effectively surrendering her $8 million in exchange for an income that would cease upon her death, leaving nothing for her heirs. 

A Better Alternative: Custom Income-Generating Portfolios 

Instead of opting for an annuity, I worked with my firm’s portfolio management team to design a bespoke income-generating portfolio tailored to her needs. Here’s how we structured it: 

• Bonds with Matched Maturities: We invested in bonds, carefully matching the maturities of these bonds to her specific income requirements throughout retirement. This approach ensures that as each bond matures, it provides the necessary income when she needs it. 

• Eliminating Market Risk: One of the key benefits of this strategy is that it significantly reduces market risk. Since we know the yield to maturity on these bonds, we can predict with confidence the interest that will be received, providing a stable and predictable income stream. 

• Preserving Capital: Unlike an annuity, this approach allows her to maintain ownership of the $8 million principal. This means that not only does she receive the income she needs, but she also retains the capital, which can be passed on to her children and loved ones. 

This strategy offers the dual benefit of providing a reliable income in retirement while preserving the capital for future generations. It’s a more flexible and potentially more rewarding approach than simply locking away money in an annuity that offers no residual value after death. 

Planning for the Future 

While we’ve structured the income-generating portfolio to meet her needs during retirement, we’ve also conducted comprehensive estate planning to ensure that the $8 million is passed on according to her wishes. This level of detailed planning ensures that her financial legacy is protected and that her loved ones are provided for, long after she’s gone.