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August 04, 2002 at 08:00 PM
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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.
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.