How to Calculate An Advisor’s Value: Annuity Planning

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How to Calculate An Advisor's Value: Annuity PlanningAllan S. Roth wrote an article for Financial Planning magazine entitled “Calculating An Advisor’s Value.” The article claimed that five different components of intelligent planning decisions comprised the value brought by a smart financial advisor. According to Morningstar, planners can add the equivalent of 1.82% annual return to clients through these five components of what they call “gamma.”

I commented on the introduction and indexed of all five components (plus two additional items) in a previous blog post. In this post I am just going to comment on the fourth of the five, “Annuity Planning”, to which Morningstar suggests that advisors bring an additional 0.24% to their clients. Here is they describe the component:


One way to reduce the likelihood that clients will outlive their money is to annuitize part of the portfolio. Typically, this is done by purchasing a single premium immediate annuity that will pay out during the client’s lifetime. This isn’t income per se, since most of the payment is actually a return of the client’s principal. Still, it can make sense in certain situations.

Without a doubt, the best single annuity option for any client – that is, the option that creates the higher monthly cash payment – is to delay Social Security. I often calculate the additional cash payment that clients would receive by delaying Social Security to age 70 from 66; it typically would cost almost 70% more to buy that same cash stream (as an annuity on the open market) than the client would be forgoing in those four years of benefits.

And certain Social Security options, such as file and suspend, allow a client’s spouse to collect spousal benefits while the client’s own benefit continues to grow.

Just to be clear I have highlighted that most immediate annuity payments are actually just returning you your own money. Roth concedes that an annuity can make sense in certain situations. But I would add that in most cases the annuities are sold and there are better asset allocation choices. Please see a fee-only fiduciary advisor before you purchase any annuity from a commission-based salesman. I’ve written an article about the false promise of annuities and annuity calculators which offer the guarantee of a diminishing lifestyle because of inflation.

Social Security optimization is where a smart advisor can offer real value. Most people take Social Security early. Conventional planning wisdom is to delay taking Social Security. Optimization is the more exact financial planning science of determining exactly what year a husband and wife should start taking Social Security and exactly which benefit they should receive when. We have written over a dozen articles on the subject but for a god overview of some of the concepts read our article “Gain $152,000 by Smart Filing for Social Security.”

Again, I don’t know how Morningstar assigned a value of 0.24% to the advice of a smart advisor. Even someone who has no assets can benefit greatly from Social Security optimization. And if Social Security is worth $600,000, gaining an extra 0.24% between age 65 and age 85 would only be worth an extra $29,500. But smart filing for Social Security is usually worth much more than that.

Here is an index to the entire “How to Calculate An Advisor’s Value” series.

And here is a link to having us help you with your comprehensive wealth management.

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David John Marotta is the Founder and President of Marotta Wealth Management. He played for the State Department chess team at age 11, graduated from Stanford, taught Computer and Information Science, and still loves math and strategy games. In addition to his financial writing, David is a co-author of The Haunting of Bob Cratchit.