What Share of a Portfolio Should Go Into Annuities?

What You Need to Know

Insurers typically cap the percentage of liquid assets that clients can put in annuities.
All clients need some cash and cash equivalents.
Clients with large nest eggs may want annuity income, an emergency fund and inflation protection.

Clients often ask me about the exact percentage of the portfolio that should go into annuity contracts.

My answer is usually, “It depends.”

Every person’s financial needs are different as well as their risk tolerance.

Here are some examples of different portfolio allocations for different types of income needs from annuities.

70% Total Portfolio Annuity Allocation Scenario

Bob and Sally are both retired.

They have a small pension and Social Security providing $40,000 per year for the rest of their lives.

Their income need for each year is $65,000.

Their total assets amount to $500,000, including $350,000 in a 401(k), $100,000 in savings and $50,000 in CDs.

Bob and Sally need an extra $25,000 per year.

To meet this need, they can invest their entire 401(k) account of $350,000.

Insurance companies typically won’t accept more than 70% of total liquid assets because they want to ensure that the investors have enough liquid cash to cover emergencies.

Since $350,000 represents 70% of Bob and Sally’s total liquid assets, their 401(k) fund is all they could invest into the annuity to meet their annual income needs.

37.5% Total Portfolio Annuity Allocation Scenario

John and Susan are both about to retire and need $70,000 in joint annual income starting in their first year of retirement.

They both worked for John’s small business, and the business paid minimal FICA taxes over the years.

Because of that, they won’t have a pension or much Social Security income to rely on.

They do, however, have $4 million in investable assets.

Since John and Susan lack a guaranteed lifetime income, they ask me what it will take to ensure a $70,000 per year guaranteed income for the rest of their lives.

They also require their income to rise along with inflation to maintain their purchasing power.

I find them a fixed index annuity with an income rider that guarantees $75,000 per year starting in 12 months.

Remember Emergencies

Everyone’s needs are different. Some retirees want out of the stock market and desire guaranteed returns from multi-year guaranteed annuities. Others want the peace of mind of guaranteed income from fixed indexed annuities and income riders.

The point is that, when you’re recommending an annuity, the best practice is to use the least amount of the client’s liquid assets needed to fund the annuity goals.

Some agents try to sell the biggest annuities possible, to increase their commissions. They do that to their clients’ detriment.

Too much of their assets tied up in annuities leaves little in liquidity for emergencies.

So, if possible, keep the total percentage of liquid assets invested into annuities at anywhere between 35% to 70%.

Everyone’s circumstances are different, and some clients want more annuities than others, especially when rates are high, so the numbers can fluctuate depending on their wants and needs.