What do you want to know
- While many employers are scrapping their retirement plans, annuities can help provide a lifetime guaranteed income option for your clients.
- An advisor should work with the client to ensure that an annuity fits their overall retirement strategy and, if so, what type.
- Annuities can have high costs and are not the right solution for all clients.
Helping your clients formulate a retirement withdrawal strategy to meet their retirement income needs is one of the most important aspects of the retirement financial planning work you do for them.
One option that clients may express an interest in — and which advisors may sometimes recommend to clients — is an annuity. Here is an overview of the factors to consider when deciding if an annuity is the right choice for a client and, if so, what type.
Review current sources of retirement income
Clients typically have a range of assets that can be leveraged for retirement income, including taxable investment accounts, IRAs, employer-sponsored retirement plans, business interests, cash, CDs and savings accounts.
Additional sources of income may include social security, a pension, and income from full-time or part-time employment.
These potential sources of retirement income should be considered in light of the client’s retirement expenses and income needs. It is also important to consider their tax situation in retirement as well as their estate planning needs. This review may lead you to consider an annuity as part of your client’s retirement income strategy.
When can an annuity help?
While many employers are scrapping their retirement plans, annuities can help provide a lifetime guaranteed income option for your clients. For some clients, annuities can fill the void left by the absence of retirement benefits.
Annuities can also be used to meet a client’s needs in a number of retirement and related areas. You want to work with them to make sure an annuity is the best choice for their specific needs, and if so, you choose the best type of annuity for their situation.
Here are some options you might consider:
Qualifying longevity annuity contract
A qualified longevity annuity contract (QLAC) is a deferred annuity that can be purchased through an employer-sponsored retirement plan, such as a 401(k) or IRA account.
The primary planning benefit of a QLAC is the ability to defer a portion of account assets until age 85 via a deferred annuity. This can help ensure that your client has an income stream later in retirement if their nest egg is depleted by overspending or a severe market downturn. Premium Dollars used for QLAC will not be subject to required minimum distributions prior to commencement of annuity.
life annuity
A life annuity can provide guaranteed income for life. There are several varieties, including fixed immediate and deferred life annuities. These annuities can fill an income gap for clients, if needed.
Income for beneficiaries
An annuity can be a solid vehicle for providing guaranteed retirement income for life to a spouse or other beneficiary. Depending on your client’s situation, an annuity may provide a solution to the problem of providing guaranteed lifetime income to both spouses. This can be critical if one spouse is the primary earner and accumulator of retirement assets.
Personalization via Riders
Many annuities can be personalized via endorsements or supplements to the contract. Riders can address concerns such as inflation or provide a minimum income level or maximum loss for the contract.
Disadvantages of annuities
Annuities also have their drawbacks. These may include:
- Cost. Annuities can be expensive. Some contracts have high internal expenses and may have onerous surrender charges.
- Fees. In some cases, annuities can result in high sales commissions for the selling agent or registered representative.
- Penalties. If your client needs the money before age 59½, they may be subject to an early withdrawal penalty in addition to any taxes or redemption fees they would incur.
Your clients may know an annuity seller through their church or other social group. This person can use this relationship to convince your client to purchase an annuity from them.
As with any financial product, encourage your client to consult with you about purchasing an annuity before making a decision. This will ensure that the annuity matches the client’s overall retirement planning and does not conflict with the planning work you have done for them.
