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Annuities are depression-proof; Babe Ruth knew the truth

by John Levan | Contributor
July 2, 2020

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Babe Ruth might have been the greatest baseball player ever, but he didn’t start out being a great manager of his money. Luckily, he was smart enough to take the advice of a fellow player who did have financial savvy. And it saved him during the Great Depression.

His name was George Herman Ruth, but everyone called him “Babe.” While sports fans remember him for his hitting prowess as a member of the New York Yankees, it’s worth noting that he spent his first five years in the majors as a pitcher for the Boston Red Sox. Soon after the Sox had transitioned him to the outfield, they traded Ruth to the Yanks and, as they say, the rest is history.

Babe Ruth was a tremendous drawing card at Yankee Stadium, and, in 1922, the team rewarded Ruth with a contract worth $52,000 per year, which is equivalent in purchasing power to just short of $800,000 in 2020. And while that was a lot of money for someone who had been raised in a Baltimore boys’ home, Babe was well on his way to blowing through it as he enjoyed the good life of the roaring 20s.

Babe Ruth’s business manager intervenes

At the urging of his business manager, Christy Walsh, Babe met with another future Hall of Famer, Harry Heilman, a member of the Detroit Tigers. Heilman had worked as an insurance agent for The Equitable in the off-season, and in 1923, he convinced Ruth to purchase a deferred annuity with his World Series winnings and a portion of his annual salary. Babe made additional annuity purchases through 1930.

When Babe began making his annuity purchases, he could not have foreseen that the roaring 1920s would end abruptly with the stock market crash of 1929, which also signaled the start of the Great Depression. Nor did he likely realize that his days as a player would come to an end as early as 1935 when his aging body (for an athlete) started to betray him.

Babe’s annuity came through in the clutch

Babe Ruth had been the highest-paid player in baseball, and now he was out of work during the darkest days of the Depression. But while other athletes were impoverished and standing in bread lines, Babe lived comfortably and was never forced to worry about running out of money.

That’s because Babe had begun receiving annuity payments in 1934. He was getting over $17,500 annually (about $290,000 today), all because of the planning that he and Harry Heilman had done a little over 10 years earlier. Just as the “Sultan of Swat” had done with his bat for so many years, the Babe’s annuity was now coming through in the clutch.

Ruth was justifiably impressed with the way his annuities had created financial security for him. And he instructed his estate to purchase a lifetime payment annuity for his wife after his death so she would always have a secure income.

What can you learn from Babe Ruth?

Although the Babe can’t help us to hit 714 home runs in the Major Leagues as he did, he can teach us something we can use: namely, that with planning and safe financial vehicles such as annuities, we can have a secure retirement regardless of what happens in the stock market.

And that lesson resonates during our current economic circumstances. Repositioning assets to shelter them from stock market volatility is a strategy that many people should be contemplating, especially those close to retirement who can ill afford a double-digit drop in their equity holdings.

Babe Ruth used what is known today as a single premium immediate annuity (SPIA). Another popular option is the deferred annuity, specifically the fixed index annuity. Both of these would be appropriate in today’s volatile economic climate.

Purchase a single premium immediate annuity, or SPIA, for guaranteed income

A single premium immediate annuity is a contract between you and an insurance company. You give the company a lump sum of money upfront, and they promise to pay you a specific amount of money periodically (typically, monthly) for the rest of your life.

An SPIA can make retirement planning more manageable because it works much like a defined-benefit pension plan with predictable income. And the annuity has a couple of advantages over withdrawing from a portfolio of stocks, bonds and mutual funds:

First, you can confidently designate a higher withdrawal rate from the annuity as opposed to the portfolio. And for an additional cost, you can also purchase a cost of living adjustment (COLA) rider for your SPIA. This rider increases your annuity payments over time based on how the rate of inflation has increased.

If you’re accumulating funds for retirement, a fixed index annuity is the right choice

A fixed index annuity is another insurance product, but it differs from the SPIA in that it is used for accumulation purposes rather than strictly for income. The annual growth of the fixed index annuity is linked to a stock market index such as the New York Stock Exchange (NYSE) or the S&P 500.

The index annuity’s growth is subject to rate floors and caps, which means it can’t exceed or drop below the specified return levels--even if the underlying stock index moves above or below these limits.

The insurance company assumes the risk of a stock market decline with this type of annuity so that you won’t lose any of your principal with a fixed index annuity, and your potential gains are usually capped at a rate between 3% and 9%.

Here are some of the reasons The Babe would have loved this product:

  • The earnings within an annuity are tax-deferred
  • Annuities typically credit interest at rates higher than CDs
  • You can contribute to your tax-deferred annuity
  • Retire with guaranteed lifetime income
  • Principal and earnings are protected regardless of the direction of interest rates
  • You create a probate-free inheritance

Considering all the benefits that annuities have to offer, it’s little wonder that Babe Ruth invested 100% of his money in them, and his famous quote still rings true today: “I may take risks in life, but I will never risk my money, I use annuities, and I never have to worry about my money.”

Alliance America can help

Alliance America is an insurance and financial services company. Our financial professionals can assist you in maximizing your retirement resources and achieving your future goals. We have access to an array of products and services, all focused on helping you enjoy the retirement lifestyle you want and deserve. You can request a no-cost, no-obligation consultation by calling 888-864-2542 today.

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