Wealth Preservation through Annuities, or Why Mike Tyson Should Have Purchased an Annuity

According to a 2009 article in Sports Illustrated, 78 percent of former NFL players have gone bankrupt or are under financial stress within two years of their retirement, and 60 percent of former NBA players are broke within five years of their retirement.

While these statistics are extraordinary and might come as a surprise, the reality is that the inability to manage and preserve wealth is not limited to professional athletes and lottery winners.  The challenge of dealing with a pot of money is also difficult for a recent retiree who is dealing with a lump sum 401k distribution that needs to last for thirty years.

There are a handful of factors that seem to be common among the range of people struggling to preserve wealth:

1. The lack of a financial plan and subsequently spending that is inappropriate and unsustainable given the level of wealth.
2. Poor financial advice.
3. Poor investments.
4. Unscrupulous friends and relatives.
5. Lack of ability or desire to become the next Warren Buffett.

Now take a moment and try to think of what might be used to address each of the issues above.  The answer is an annuity:

1. Annuitizing a portion of one’s wealth will ensure that spending is responsible and sustainable because the income stream generated by the annuity will be proportional to the wealth used to generate it.
2. The wealth is locked-up in the annuity, so no ability for misguided financial advisors to render advice or take actions that result in loss of capital.
3. Investment responsibility (and risk) is pretty much outsourced with an annuity.  No need to worry about the fly-by-night investment in the company that manufactures inflatable rafts that sit under your sofa (former Minnesota Twins outfielder Tori Hunter was taken in on that one).
4.  Buying the annuity would also keep the posse at arm’s-length.  Consistently tapping into the monthly income stream is much more difficult than grabbing a chunk of the overall pot of wealth.
5. No need for Buffett—let the insurance company deal with the complexity of guaranteeing that there is a life-long income stream that is generated by your hard-earned funds.

The bottom-line is that an annuity can be a very effective wealth preservation tool, particularly for the 99.9 percent of us with neither the interest nor ability to manage a large sum of money.