Advisers Can Help Retirement Savers Navigate Annuities

Annuities can be a big help against longevity risk, but these products are complex.
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Financial advisers know their clients probably see a lot of ads for annuities, and perhaps even get some pitches from insurance agents and registered reps they may know. Some have characterized annuities as financial products that are sold rather than bought. The reality is that annuities might make sense for your clients, but it's important for them to invest in the right type of annuity contract for their situation.

What Problem can an Annuity Solve?

With any financial product you might recommend to your clients, you undoubtedly make these recommendations because the product solves a problem for the client or does something to enhance their financial situation.

Perhaps they need a component of their retirement income that is guaranteed. Or perhaps they are concerned about having a portion of their retirement income protected against downside losses. Other clients might be looking for another investment vehicle that offers tax-deferred growth.

Annuities of various types can solve these and other financial problems for your clients as they look to plan their retirement income stream.

Where Does the Annuity fit?

As you work with your clients on their retirement planning, these plans will have a number of components. These components might include investments in taxable investment accounts as well in tax-advantaged accounts like traditional and Roth 401(k)s or IRAs.

An annuity can augment the benefits of these investment accounts by offering lifetime income to supplement their withdrawal strategy as well their Social Security benefits. While every client is different, annuities are generally most useful as a supplement to other parts of your client’s retirement portfolio and income sources.

With the number of employers offering pensions continuing to dwindle, an annuity can help fill at least part of this void. Income annuities offer a guaranteed lifetime stream of income. These annuities can be immediate or deferred. The right product will depend upon your client’s age and the amount and nature of the rest of their retirement nest egg.

However, if there is a chance that your client will need access to the cash contributed to the annuity within a few years, an income annuity might not be the best option for your client. While some of these products offer a rider that grants access to some or all of the contract premiums, these riders can be costly.

Variable annuities can be an option for clients who are looking for another option for tax-deferred growth. Perhaps they don’t have access to a 401(k) or similar retirement plan through their employer, or if they do perhaps the plan is a subpar one. Variable annuities offer the opportunity for tax-deferred growth in a similar fashion to contributing after-tax dollars to a traditional IRA account. Investment options usually include sub-accounts that are similar to mutual funds. Money can generally be withdrawn as a lump-sum or via one of a number annuitization options that are generally available.

Another popular option touted by many insurance agents and registered reps are index annuities. The returns of these products are generally tied to an index like the S&P 500, though the annual participation rate in the upside of the index is usually capped. One of the draws of these products is there is usually a floor on the level of return, these products can help prevent losses in down markets.

Costs, Features and Benefits

One of the complaints about annuities by many financial advisers and direct consumers of these products is the cost. Often these products have high internal fees, sometimes these fees are hard for even those who are experienced financial advisers to identify within the product. Additionally, many annuities come with onerous surrender fees.

The industry continues to introduce new products that are better suited to the practices of fee-only financial advisers who act as fiduciaries to their clients.

If you feel that an annuity is potentially the right answer for a portion of your client’s retirement nest egg, be sure to look at all of the costs, features and benefits of any product that you are considering. Also if your client brings you an annuity product that they have been pitched for review, be sure to show them the pros and cons of this product. This offers you the chance to educate and still be tactful regarding the intentions of a friend or associate who may have pitched it to them.

With increased life expectancies putting a strain on the ability of your client’s retirement savings to last for their lifetimes, annuities can be a solid addition in some cases. It’s your job as their financial adviser to suggest the best annuity product for their situation, or to suggest they avoid annuities if that is the right answer for them.