Take Control Blog

Annuities and Divorce

I just came across a case where an individual purchased an annuity shortly after the divorce, and the decision did not make financial sense to me. It seems to me like individuals of “silver divorces” and annuities are often linked, which is not always a good thing. To delve into this very important topic, I reached out to Jennifer Failla, a Certified Divorce Financial Analyst and Principal of Strada Wealth Management.

TBK: As a financial vehicle, what exactly is an annuity?

FAILLA: An annuity is an insurance product, which serves as investment account that pays out income in the future. Typically an annuity is used to save for retirement or to generate a consistent stream of income in retirement. Basically, an individual makes an investment in the annuity, and it then the annuity pays the invidiaully in the future. There numerous kinds of annuities. The one that is right for the client depends heavily on their goals: saving for retirement or income in retirement.

TBK: What is the financial rational for buying an annuity?

FAILLA: If an individual is saving for retirement and is in what’s termed the “accumulation phase” of earnings, an annuity can be very beneficial. The individual can take before or after-tax dollars and shelter the growth in a deferred annuity until ready to distribute the money. With the latter goal in mind, annuities can provide a stable source of income in retirement. How much an individual receives depends on whether the investment was for a guaranteed payout (fixed annuity) or a payout stream determined by the performance of the annuity’s underlying investments (variable annuity).

TBK: As it pertains to divorce, when does an annuity make sense?

FAILLA: In divorce cases, annuities are good to consider when an individual needs guaranteed income now or in the future. An applicable case would be if one of the spouses receives a lump sum of cash and is able to take some of the cash, invest it, and defer gains in order guarantee a steady stream of income later. The key here is that there needs to be sufficient money so as to maintain the desired standard of living now, taking into account that the money moved into the annuity will not be available.

TBK: What should a divorced person consider before buying an annuity?

FAILLA: While annuities can be useful retirement planning tools, they can also be a bad investment choice for some people. The first thing to consider is fees. Fees within annuity contracts can be very high and hard to decipher, making it very difficult for an individual investor to net a return without taking additional market risk or giving up control of the money. Secondly, be aware that annuities are most often sold by insurance agents who profit significantly in commissions. Finally, no one can predict what will happen in their life, so having access to their own money without penalty is a consideration—liquidity, especially in the case of divorce, needs to be calculated carefully.