Feb. 27, 2019 ONLINE EXCLUSIVE: Managing the Longevity Equation with Annuities
As you help your clients build wealth and plan for the future, there are many difficult discussions to be had along the way. There are certain topics—whether it’s long-term care coverage or estate planning—that many individuals would rather not think about. But perhaps the most fraught-filled conversations for clients are those centering on the possibility of outliving their money and facing a crisis in retirement.
Unfortunately, some clients may have reason to worry. We’re seeing more and more headlines speak to the growing concern that many Americans won’t have the resources to support their health and wellness in their so-called golden years, especially as we’re all living longer: “The Numbers You Need to Know About the Retirement Crisis” (PBS NewsHour), “How to Solve the Retirement Crisis” (POLITICO), and “What Happens If We All Run Out of Money for Retirement?” (U.S. News & World Report), just to point out a few. But as you know well, this crisis can be avoided with some careful planning. One potential solution? Annuities.
Annuities (a.k.a., “Longevity Insurance”)
One way to approach this particular planning discussion is to focus on “longevity insurance.” Like other types of insurance, the objective here isn’t necessarily to achieve the highest rate of return. Rather, it is to protect against a catastrophic event—in this case, outliving one’s assets and being forced into a much lower standard of living in retirement.
With longevity insurance, you can increase your clients’ guaranteed income streams to provide at least a minimum level of income and a certain standard of living. There are several annuity products that can provide this type of protection. Let’s take a closer look.
Single premium immediate annuities (SPIAs). Perhaps the most straightforward option is the SPIA. Here, the client simply exchanges an asset for an income stream contract. Like CDs or fixed annuities, SPIAs come at no explicit cost to the client. Instead, the annuity company provides a payout rate, based on its overall book of business, at which it believes it can still make a profit.
Deferred income annuities (DIAs). SPIAs can be purchased with an income stream set to start well into the future. When this is the case, the SPIA is referred to as a DIA. This deferment can significantly increase the payout rate, potentially allowing clients to have a higher level of income in their later retirement years. Some clients may want to purchase DIAs several years before retirement, with the income deferred until the beginning of a planned retirement start date. Others may choose to purchase DIAs at the start of their retirement, with the income stream beginning at some point down the line.
Variable and fixed-indexed annuities. These annuity options offer lifetime income riders that can work quite differently from the other options during the deferral phase.
- With variable annuities, there is the potential for the income to surpass the minimum guaranteed projection calculated at the time of annuity purchase.
- Compared with other types of annuities, fixed-indexed annuities offer a much lower fee structure, as well as downside protection on the account value. These features can mitigate the risk of poor investment performance during the withdrawal phase, which may deplete the account value more quickly than anticipated. Plus, by preserving the account value for a longer period of time, fixed-indexed annuities potentially leave more funds available to pass on to beneficiaries.
Of course, within these basic annuity types, there are many different variations from which to choose. These include level or increasing income, investment options, and the time frame in which the product would work. There are also various calculations used. Many annuities calculate income based on a “benefit base,” which automatically increases for a number of years in deferral, rather than on the actual account value. The sole purpose of the benefit base is for calculating income; as it is not the actual value of the annuity, the client could not withdraw the benefit base as a lump sum. Others simply capture an anniversary value based on investment performance while in the deferral phase and allow clients to “fund” the guarantee as they go along. Still other variations exist with fixed-indexed annuities, for example, where index performance can affect future income, along with an increasing withdrawal rate or “enhanced interest” on the figure used to calculate income while in deferral.
Income You Can’t Outlive
With good health and a secure, comfortable income stream, most clients would welcome the idea of living well into old age and watching their kids and grandchildren grow. And with the right planning in place, long life does not have to be a problem! Annuities—along with social security and, perhaps, a pension income—can provide an income stream that your client cannot spend down or outlive. In some situations, they can even supply a higher payout rate, allowing a lower rate of withdrawal on your clients’ other monies.