What Are Annuities?
Annuities are a powerful tool that can help you address the complex retirement planning needs of your clients. They provide a robust solution, where a steady stream of income flows into your bank account like clockwork.
That's the promise of annuities— a financial product designed to provide a guaranteed income for a set period, or even the rest of your client’s life.
Whether the client’s goal is to enjoy a worry free retirement or leave a lasting legacy, by offering annuities, wealth advisors can better serve high-net-worth individuals (HNWI) with a safety net that aligns with their unique needs.
The beauty of annuities lies in their ease and security. By simply handing over a lump sum, in return, your clients secure a stable income regardless of what happens in the market.
Types of Annuities
There are several types of annuities available, each with its own unique features and benefits:
Fixed Annuities
Fixed annuities offer a guaranteed, fixed interest rate for a specified term. This type of annuity provides a stable, predictable income stream, making it an attractive option for those seeking a reliable source of income in retirement.
Variable Annuities
Variable annuities are investments in a variety of sub-accounts, with income based on the performance of those investments. While this type of annuity offers the potential for higher returns, it also carries more risk than fixed annuities.
Indexed Annuities
Indexed annuities provide a return based on the performance of a specified market index, such as the S&P 500. This type of annuity offers the potential for higher returns than fixed annuities, while still providing some level of protection against market downturns.
Immediate Annuities
Immediate annuities begin paying out income immediately after the initial investment. This type of annuity is often used by retirees who need to start receiving income right away.
Deferred Annuities
Deferred annuities delay income payments until a later date, allowing an investment to grow tax-deferred until you begin receiving payments. This type of annuity can be a good option for those who are still working and don't need immediate income.
How Do Annuities Work?
The amount of income received from an annuity depends on several factors.
Generally, the larger the initial investment and the age of a client when they start receiving payments, the higher the income will be. For example, if $100,000 is invested in a lifetime annuity at age 65, the result might be around a $6,000 per year lifetime payout. When structuring annuities, advisors should factor in how the timing of initiation can influence both the length of the payout period and the opportunity for wealth accumulation.
Another factor that affects annuity income is the type of annuity chosen. For instance, a fixed annuity, such as a Multi-Year Guaranteed Annuity (MYGA), provides a stable interest rate, meaning income remains predictable and unaffected by market volatility.
In contrast, a variable annuity offers the potential for higher returns, which invests in a diversified portfolio of stocks and bonds, but income payments may fluctuate depending on market performance.
Ultimately, the type of annuity chosen should align with financial goals, risk tolerance, and overall retirement income strategy.
Benefits and Drawbacks of Annuities
Annuities offer several benefits, including guaranteed, predictable income and the potential for lifetime income, providing longevity protection. They are also low-risk, regulated investments with minimal ongoing fees.
A study by the RAND Corporation found that retirees with a high percentage of annuitized income are significantly happier in retirement than their non-annuitized peers. Among people who have been retired for 10 years or longer, those with annuitized income are 43% more likely to consider themselves "very satisfied" than those without.
However, annuities also have some limitations. These include the opportunity cost of missing out on potential market gains, inflation risk (fixed payments may not keep up with rising costs), limited liquidity (funds are locked in for a set term), and less flexibility for leaving an inheritance.
It's worth noting that any drawbacks of annuities can be mitigated through careful planning and selection of the right type of annuity. For instance, some annuities offer inflation protection or partial liquidity options.
Are Annuities Safe?
Annuities are generally considered a safe investment option, as they are issued by insurance companies that are heavily regulated to ensure they can meet their obligations to policyholders. These companies are required to maintain substantial reserves to back their annuity contracts, ensuring they can meet their long-term commitments.
Overall, while no investment is entirely without risk, annuities have a strong track record of security and can provide valuable guaranteed income for retirement planning.
Are Annuities Right for Your Practice?
Annuities can be a valuable tool for retirement income planning, particularly for clients who are concerned about outliving their savings. However, annuities may not be the best fit for everyone. Before offering an annuity, consider the client’s overall financial situation, risk tolerance, and income needs.
At D. French Advisors, we can help you integrate annuity offerings in your practice by leveraging our extensive network to connect you with industry-leading partners who offer product-agnostic solutions tailored to your unique needs. Get in touch with us to bridge the gap between financial security and client satisfaction.
Resources
1. Navigating the Annuity Surge: Trends, Challenges, and Opportunities for Advisors. Halo Investing. 2024.
2. Annuity Benefits: Retirement Satisfaction and Happiness. TIAA. 2024.
