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Retirement Planning > Saving for Retirement

Moving Clients Towards Annuitization

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Many of your clients may be planning to retire early–and most will likely live longer than their parents and grandparents ever imagined.

Retiring younger and living longer, combined with the diminishing role of Social Security, means helping your clients develop a realistic financial retirement plan–one that includes personal savings and income protection–has become even more critical. How will your clients know if they really have enough?

Annuities can be an effective tool to meet the needs of the Baby Boomer generation. Created to help assure clients a sound financial future, annuities can provide retirees with an income stream that they cannot outlive. No other retirement vehicle, other than the rapidly disappearing defined benefit plan, offers the possibility of income for life.

Over the last decade, hundreds of billions of dollars worth of annuity contracts have been purchased. A driving factor in their appeal is the tax-advantage they afford the contract holders. While many investors own annuities for wealth accumulation purposes, statistics by LIMRA International show that only 1% of those owning an annuity choose to annuitize their contract(s).

With a guaranteed income for life opportunity, and only 1% of contract owners choosing annuitization, the question we must ask ourselves is “Why?”

A widely held belief is that there hasnt been enough education for both the broker and the client. Annuitization has been considered “complicated” and when you add to that the “loss-of-money control” factor, its a tough sell. However, it is also believed that with an increased effort on education by the annuity industry, the positive aspects of annuitization will come shining through.

For instance, its important to note that for those investors who opted for an annuity primarily for its tax-deferred treatment, annuitization provides more tax advantage than a lump sum distribution. If an investor takes a lump sum payout of his annuity, all the interest is taxed up front and the hit can be hefty. For those who choose annuitization, the tax treatment is much more generous. The IRS considers distributions as part principal and part interest. Therefore, the investor pays taxes on the smaller interest amounts spread over time.

Beyond the tax advantages of annuitization are the guarantees it provides. As much as wed like to control our destiny, one thing is certain–we dont know how long were going to live. Therefore, we dont know how long were going to need to support ourselves in retirement despite available longevity tables.

What happens if our calculations are wrong? We live longer and our money doesnt. What better way to guarantee income for life than through annuitization?

But many retirees choose an alternative to annuitization by systematically taking partial withdrawals from their retirement savings. This popular choice has a high probability of depleting a clients savings while they still need income.

Take, for example, chart 1, which compares the after-tax annual payment from a life with 20 years certain annuity to the after-tax withdrawals from a systematic withdrawal program. Setting the systematic withdrawal equal to the amount that would be paid with the annuity, you can see that the retirement savings run out while the annuity keeps on going. In fact, under the described scenario, a 65- year-old taking systematic withdrawals would have a 40% chance of outliving their savings!

To combat the “loss of money control” factor, one should look to the liquidity features provided by todays variable immediate annuities. Many have liquidity features that significantly limit the loss of control, as can be shown by chart 2. Using the same example as above, you can see that the cash value of the annuity could be as great or better than the cash balance available from retirement savings.

While your clients may seek you out to develop a retirement plan, you can have a greater impact on their financial future by ensuring they do not outlive it. If the market has not been as kind to them (as it has not been to many), chances are they are at risk. Their options for receiving income in retirement are numerous and annuitization can provide them with the flexibility and comfort they need. By helping them choose annuitization, you become an instrumental part of their retirement success.

is vice president, retirement products and services, at Sun Life Financial, Wellesley Hills, Mass. His e-mail address is

[email protected]

Reproduced from National Underwriter Life & Health/Financial Services Edition, August 5, 2002. Copyright 2002 by The National Underwriter Company in the serial publication. All rights reserved.Copyright in this article as an independent work may be held by the author.


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