Key Takeaways:
- Sequence of returns risk and longevity risk are two retirement planning challenges that may not be solved with a growth portfolio alone.
- All annuities are not created equal. Fixed indexed annuities are different from variable annuities. Understanding the difference is the starting point for an informed conversation
- Certain annuities can provide income that is not dependent on market performance which can reduce the pressure on your portfolio
- Whether an annuity belongs in your plan depends on your specific situation. At The CP Welde Group, that evaluation is determined within the context of a comprehensive financial plan.
If you are at or near retirement, the decisions you make about your income plan can carry more weight than at any other point in your financial life. The portfolio you have built is no longer just a growth vehicle. It is about to become your retirement paycheck.
As a CPA and financial advisor working with families in Chadds Ford and the surrounding Delaware and Chester County areas, I’ve had many versions of the same conversation. Someone walks in with a well-built portfolio, decades of disciplined saving behind them, and a clear picture of when they want to retire. What they do not yet have is a plan for turning that portfolio into a reliable and tax-efficient income stream. That shift, from accumulation to distribution, is where retirement planning gets more complex, and where the stakes can be the highest.
This shift creates a risk many investors do not fully account for until they are already living it. It’s called sequence of returns risk, and for high-net-worth families approaching retirement, it may be the most consequential planning consideration that you have not yet had a conversation about.
Why a Growth Portfolio Alone May Not Be Enough for Retirement
When markets are performing well, the instinct to stay fully invested can initially feel like the right call. For investors approaching retirement with significant wealth in market-linked accounts, that instinct may be worth a second look.
A well-built portfolio is designed to grow by staying invested through market cycles. That works because time absorbs volatility. A downturn in year three of a 30-year accumulation phase is a footnote. A downturn in year three of retirement, when you are already drawing income from that portfolio, is a different problem entirely.
The challenge is not how much you have saved. Many of the families we work with enter retirement with more than enough on paper. The challenge is that drawing income from a portfolio while it is declining in value can do lasting damage, even if markets eventually recover. The shares sold during a downturn to fund your living expenses do not come back when prices rise.
This is why retirement income planning often calls for at least one source of income that is not dependent on what the market is doing in a given year.
Three Sources of Protected Income in Retirement
There are three primary sources of income not tied to market performance available to retirees:
- Government programs such as Social Security and pension income
- Bank and savings products such as CDs and money market accounts
- Insurance-based products designed to provide protected income over a defined period or for life
Most people approaching retirement have at least one of these in place. The challenge for high earners is that Social Security was designed to replace a portion of average wages, not a full lifestyle. Without a pension, the gap between what you receive in guaranteed income and what you actually need to spend can be significant.
That gap matters for another reason. People are living longer than ever, which means retirements need to last longer too, though many plans were not built with that reality in mind. A plan designed for 20 years may now need to carry you for 30 years or more. A source of income that does not diminish with age or market conditions becomes more valuable the longer retirement lasts.
Many of the families we work with have most of their retirement savings sitting in pre-tax accounts like 401(k)s and IRAs, which means not only do they face an income gap, but withdrawals also carry a tax cost. When we think about protected income sources, we consider them alongside a client's full tax picture. This coordination is what often helps determine how much retirement income will stay in the family's pocket.
The Annuity Reputation: What Is Earned and What Has Changed
High-profile disputes between wealthy investors and financial product providers have made headlines in recent years, and the pattern is often the same: a complex product sold on the promise of safety and growth, with costs and risks that were not fully understood at the time of purchase. That experience is real, and it shaped how many sophisticated investors think about insurance-based financial products today.
The annuities commonly used in retirement income strategies today are fixed indexed annuities (FIAs) which offer the potential to earn interest based on a market index, while contractually protecting your principal against market loss. If the market declines, your account value does not. If it rises, you participate in a portion of those gains. Today, most FIAs carry contract terms of five, seven, or ten years, which is a meaningful shift from the decades-long commitments that gave this category its reputation.
Annuities are not appropriate for everyone, nor were they designed to be. But understanding what they are today, rather than what they were 20 years ago, is a good place to start.
How Do Annuities Fit Into a Coordinated Retirement Income Plan?
A reliable income source that is not tied to market performance, whether Social Security, a pension, or an annuity, can reduce how much pressure your portfolio is under to produce consistent income year after year. For households whose guaranteed income does not fully cover essential living expenses in retirement, that additional layer of protection can play a meaningful role.
Annuities are not the answer for everyone. If your Social Security and pension income already cover your essential expenses comfortably, an annuity may not add much value. But if there is an income gap between what you know you will receive and what you know you will need, that gap is worth addressing intentionally rather than relying solely on the portfolio.
At The CP Welde Group, we use The Bucket Plan® to organize assets based upon when they’ll be needed. Long-term growth assets are never the source of short-term income needs. The preservation stage of that framework, protecting what you have built becomes just as important as the continued growth of your portfolio.
Questions Worth Asking Before Any Annuity Decision
Whether an annuity makes sense for you comes down to your specific situation. Here are four questions worth working through:
- What specific problem would this solve? If your guaranteed income sources do not fully cover your essential monthly expenses in retirement, a protected income source may help bridge that gap.
- What guaranteed income do you already have? Social Security and pension income (if any) should be the starting point. The gap between those sources and your essential spending is where an annuity may be a potential solution.
- How accessible does this money need to be? Annuities are not a good fit for money you may need in the near term. If you anticipate a significant expense, such as a home purchase, a healthcare need, or family gifting, within the next several years, those funds are likely better kept accessible.
- What are the fees, surrender terms, and contract length? A fiduciary advisor can clearly explain each of these as part of a planning conversation.
At The CP Welde Group, we evaluate annuities within the context of our Five Pillars of Holistic Wealth Management: Financial Planning, Asset Management, Tax Management, Protection Planning, and Legacy Planning. With CPA and CFP® credentials, we bring a tax-focused lens to every protection planning conversation. Whether or not an annuity belongs in your plan is a conversation worth having with someone who is working in your best interest.
Schedule a Complimentary Consultationor call us at 610-388-7705.
Frequently Asked Questions About Annuities and Retirement Income Planning
Are annuities a good option for retirement income?
Annuities may serve a useful role when they address a specific need, such as creating reliable lifetime income or reducing how much your portfolio has to produce each year. Whether one is appropriate depends on your full financial picture, not on the product category alone.
What is sequence of returns risk, and why does it matter for retirees?
Sequence of returns risk is the danger that a market downturn occurs when withdrawals are already underway. Because you may be selling assets at reduced values to fund living expenses, a portfolio may not fully recover even when markets rebound, which can have a lasting effect on how long your money lasts.
How are fixed indexed annuities different from variable annuities?
Fixed indexed annuities offer interest crediting tied to a market index with contractual protection against market loss, meaning your principal does not decline when the market does. Variable annuities typically tie the account value directly to market performance.
How should taxes factor into an annuity decision?
Taxes should be reviewed before an annuity is added to your plan. The tax treatment depends on how the annuity is funded, what type of account owns it, how income is taken, and how the asset fits into your estate plan.
When may an annuity not make sense?
An annuity may not be appropriate if you have significant liquidity needs during the contract period, your existing guaranteed income already covers your essential expenses, or if the contract terms do not align with your financial plan.
What is The Bucket Plan®, and how do annuities fit into it?
The Bucket Plan® organizes assets by when you will need them, helping ensure current income needs are never funded by long-term growth assets. For those who need a source of income that is not dependent on market performance, annuities may be a smart addition to the appropriate bucket.
About the Author: Charles Welde, CPA, CFP®, is a financial advisor and founder of The CP Welde Group, a holistic wealth management firm based in Chadds Ford, PA. He specializes in retirement income planning and tax-efficient strategies for high-net-worth individuals, families, and business owners throughout the greater Delaware and Chester County areas. Charles is also a member of Ed Slott’s Master Elite IRA Advisor Group and host of the Re-Engineering Your Finances podcast.