Annuities may offer a security blanket in uncertain times

Our friends are starting to retire, and we get to celebrate with them and hear all about their exciting plans. Yet often enough I hear about sleep-killing money anxiety, too, even from the best-prepared.

Only when it happened again last weekend did I realize there's no reason to be surprised.

Americans routinely report anxiety about money, particularly middle-aged people. Even though Gallup's most recent poll on finances was its most optimistic in a while, more than half of American adults reported themselves as either very or moderately worried about not having enough money for retirement.

It probably doesn't help with stress levels to have daily reminders online and in newspapers about all the reasons people should be anxious. A quick search on "outliving your money" turned up hundreds of hits, one of the most recent asking simply "are you prepared to live to be 100?"

For those of us who have had no choice but a do-it-yourself retirement program, there just isn't a sure path to a worry-free future. Even what looks simple isn't.

There's no better example than deciding whether it's smart to purchase a better night's sleep in retirement by buying an annuity.

In their basic form, retirees "annuitize" their savings by turning over a chunk of them — and the anxiety about how to best invest it — to an insurance company in exchange for collecting a check for the rest of their lives. A sickening slide in the stock market all over the news? Shrug it off. Another check is due, and it will be the same amount as last month's.

Annuities also can help people with what's called the drawdown problem, which means how much to safely take out of savings every year to live on.

The recent rule of thumb is 4 percent of savings per year, but retirees who worry about outliving their money might spend even less. They eat store-brand canned soup and keep the thermostat at 60 degrees all winter for years, only to one day realize they will be leaving an estate they didn't get to enjoy. An annuity might have let them live a richer life.

But it turns out that buying an annuity isn't exactly a worry-free solution. Setting aside their expense, one problem with the traditional annuity is that you might die right away. The life insurance folks have responded to that worry by offering annuity contracts that would get the family some or all of the money back, maybe by continuing payments up through 20 years whether dad's still around or not.

Yet annuities don't seem popular with a lot of financial planners and money managers. The reason is that "you've given up your asset, it's gone," said Greg Mortenson, a founding partner of Edina-based Capstone Advisory Group.

Simply put, people in retirement may have the monthly budget covered but can find themselves with a medical problem Medicare won't fully cover or a relative in need of help. If most of the savings went to the insurance company, another check may be coming next month but the crisis is today.

Mortenson has also met plenty of people nearing retirement who seem anxious about their finances, even those who seem to have enough.

Part of their problem, he said, is that they are awash in far too much information, with round-the-clock headlines on financial markets.

The stock market is near its highs, "but they remember 2000 to 2002 and they certainly remember 2008," he said, and the brutal bear market in stocks associated with the Great Recession.

His firm's approach to helping clients worry less is to show them how they can generate income without giving up a big piece of their savings.

He and his colleagues carefully assess how much a client's family needs per month in retirement and the minimum return they would need to get from their 401(k) accounts and other savings plans.

In most cases clients can see how they can even afford to move some money out of riskier assets like stocks and still generate enough investment gains to cover their monthly needs.

"So we try to assuage some of that fear, by saying, 'You don't need all that risk,' " he said. " 'All we need to do is make sure you don't run out of money.' "

For the worriers among us — and remember, this is most of us — there seems in this case to be a choice between worrying about the market risks in a portfolio or trying to lock in an income stream with an insurance company and then worrying about not having the savings your family might need.

I see a role for annuities for people who could really use some security. There are annuities, though, that seem to be invented-in-a-lab hybrids that are a cross between a mutual fund investment and an insurance policy. Some skepticism toward those seems healthy.

My advice is rarely about financial products, though, and more about how to feel better about the money people have right now. One can't-miss approach is simply to give more of it away. Yes, that seems counterintuitive, but the old wisdom on generosity has gotten academic support of late.

I also routinely advise people to make sure money is routinely set aside and invested and then just not worry so much about worrying. It turns out humans are natural-born worriers, a hard-wired trait that came from the most successful of our prehistoric ancestors. To get through the day they had to be carefully attuned to all the threats around them. The careless and carefree? Their lineage dead-ended a very long time ago.

So when it comes to your money, feel free to worry a little. It's one of the things that's kept you alive this long.

lee.schafer@startribune.com 612-673-4302