Recently a friend posed a hypothetical question for me to answer. He asked, “If you won a lottery, what would you do with the winnings–take cash or opt for an annuity?” Without hesitation I replied that if the jackpot were large (multi-millions) I would choose an annuity. He said, “I find that to be an incredible answer; you are 82-years old and there is little chance that you will live the 25 or 30 years necessary to collect the full payout. Why not take the cash?”

I explained that if I took cash I would have to manage a large amount of money–far beyond my needs–or hire someone to do it for me. The annuity takes care of this and without charge or risk. I would also have to make provisions for distribution of the residue at my demise. This would be done automatically through the annuity with payments continuing on to my named beneficiaries, which incidentally could be changed, if necessary, prior to my demise. What a simple way to distribute part of an estate. The funds are professionally managed, not only during my lifetime but also for my heirs. If I had concern that the heirs might sell the income entitlement for cash, I could run the proceeds through my family trust and head that off.

There have been many horror stories of lottery winners squandering their cash payments, being victimized, or developing bad lifestyles from too much ready cash. I know of no such instance where the annuity was selected.

Well, all this is purely hypothetical, because the likelihood of one ever hitting such a jackpot is extremely remote. Unfortunately, though, too many people plan their financial lives as if they will someday be rescued by a lottery win. They are also the same people who would likely take the cash and run.

However, many people do create their jackpot, albeit smaller than a mega-bucks lottery win. Through IRAs, 401(k)s, company pension plans, personal savings and investments, a sizable sum may be created during a person’s working lifetime. Then comes retirement and earnings from our labor cease. What do we do with this carefully created jackpot or nest egg?

Many of the assets may have been growing in value, but it may all be on paper. It is not income and what has been growing may mature and shrink–or worse yet–die. Unless the nest egg is huge it is not likely that it will generate sufficient interest or dividends to replace a sizable portion of one’s former earned income. Therefore, changes need to be made to assure adequate income that will last for one’s entire life. You can’t live on paper profits, and speculation with retirement funds can be a recipe for disaster. The greatest unknown is, of course, how long the income must last; none of us knows when our time is up.

While I have never been faced with the challenge of what to do with lottery winnings, I was, however, forced to deal with the issue when I retired 13 years ago. But again, without hesitation, I followed the dictates of my beliefs and opted to maximize my income with annuities. Pension funds, 401(k), policy cash values and some personal savings all went into annuities to replace enough of my earned income to maintain our current lifestyle. The annuities were all joint and survivor so Gladys is also protected for life. You might ask, ‘What about your heirs? Are you cutting them off with this strategy?’ Some of the annuities had period certain guarantees to protect the heirs in the event of early demise. However, long term, the income from annuities conserves other assets (housing, savings) that tend to grow in value and will be available to the heirs. Many people with uncertain income often have to sell off such assets to stay afloat in later life.

One other thought, a digression, seems appropriate here. Among the annuities we purchased were 2 charitable annuities. At the time I was chairman of a multi-state fundraising activity for a national charity. Charitable annuities were featured as a means of contributing to the fund in a tax-wise manner. In order to speak from experience to the groups I was addressing, I purchased both a fixed charitable annuity and a variable one. The amount of money going into the variable account was slightly more than that going into the fixed account. Despite the fact that the annuities are both managed by the same large and very competent organization, after 11 years the variable annuity has never produced more than 76% of the fixed account. You can draw your own conclusions; but as for me, I’m hooked on fixed annuities.

Also, as an aside, several of my friends who retired about the same time I did (1993) opted for lump sum payments from their pension accounts. In the late 90s they saw their accounts rise, only to crash when the stock market bubble burst. At least 2 of them are now back at work.

My friend Rod Geer, former staff head at the Million Dollar Round Table, maintains, “Growing old is not for wimps.” He is right. We have enough problems we can’t control and we don’t need the aggravation of worrying about “if” our income is adequate and how long it will last.

Quote

“Unless the nest egg is huge it is not likely that it will generate sufficient interest or dividends to replace a sizable portion of one’s former earned income. Therefore, changes need to be made to assure adequate income that will last for one’s entire life. You can’t live on paper profits, and speculation with retirement funds can be a recipe for disaster.”