November 8, 2012

How New Deferred Annuities Provide Income Early in Retirement

Creating products to provide sustainable retirement income for the diverse group of baby boomers preparing to enter retirement has presented a substantial challenge for insurance companies, and they are stepping up to the task. The lack of the traditional pension plans common to earlier generations, coupled with the uncertainty surrounding the long-term viability of the Social Security system, has these clients searching for alternative ways to generate secure income during retirement. In response, insurance companies have begun building annuity products in a variety of shapes and sizes, and the latest crop of deferred income annuity products could pave the way for clients seeking to maximize retirement income security in the years leading up to retirement.

Minimizing Risk

The traditional deferred income annuity allows clients to purchase the product before entering retirement, but typically provides that the annuity income stream will not begin until much later—in some cases, income is deferred until the client reaches age 80 or 85. While this type of longevity insurance is often a smart choice for retirees, newly developed deferred income annuities allow your clients to purchase a retirement income stream that can begin as soon as they enter retirement.

Because the client is purchasing a deferred income annuity where payouts begin approximately five years after purchase, rather than 15 or 20 years after, the risk that the client will not live long enough to reap the benefits of his investment is dramatically diminished.

This product facet makes these deferred income annuity products very attractive to clients looking for a guaranteed stream of income even in the early years of retirement—at a time when many of their peers are attempting to develop a withdrawal rate strategy for their IRAs or 401(k) plans. Instead, clients have the option of rolling the funds from their traditional retirement account into a deferred income annuity, where the income payout amount is determined and guaranteed.

Maximizing Income Growth Potential

Many of these new deferred income annuities also allow clients to collect nonguaranteed dividends over the life of the annuity product. Clients have the option to collect the cash dividends offered or can reinvest the dividends into the annuity product to increase their guaranteed income stream.

This option gives clients the flexibility to invest dividend income elsewhere in strongly performing equity markets but also allows them to keep the added income within the secure annuity product in a down market.

Within this product group, the likelihood that nonguaranteed dividends will be paid is high because these annuity products do not provide clients with the option of cashing out the annuity to receive a lump sum payment. By eliminating this option, the insurance companies offering these products have a longer guaranteed period during which they can invest your client’s money, which allows the companies to maximize overall investment performance provided by the pool of clients that purchase these products.

As your baby boomer clients have only recently begun to enter retirement, it is a near certainty that these types of income-guaranteeing products will remain in demand for years. While there is no one-size-fits-all solution, the increasingly robust market for deferred income annuities has insurance companies continually updating their portfolios of available products to provide the solutions your clients need. 

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