Variable Annuities: Its Time To Go Back to Basics In A Benefits-Driven World
Investors continue to choose variable annuities as they plan for their golden years. This isnt surprising, given the 76 million baby boomers preparing to retire. Many will look to financial advisors for guidance as they try to determine how to fund the 30 or more years they may spend in retirement. It is important, therefore, that producers renew their focus on the fundamental benefits of VAs in order to better prepare their clients for the future.
Education is Key
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To effectively tap the $40 trillion of assets that these individuals will control during their retirement years, we need to take another look at the way variable annuities are sold. These products have become incredibly complex. As a result, we must shift the focus of our sales efforts back to the basicseducating clients about the product, features and benefits so they, in turn, are equipped to make sound investment decisions.
The first order of priority is to develop a thorough understanding of the investor and his or her needs. Does a VA make sense given the investment horizon, risk profile and potential liquidity needs? Once it has been determined that a VA is a suitable investment, the process of client education can begin.
Outpacing Inflation is a Priority
Its important not to lose sight of the primary reason most people invest for retirement, regardless of the product in which they invest. They need to grow their nest egg above and beyond the rate of inflation. VAs can help them achieve this objective by controlling taxes until the accumulated values are accessed, providing a wide range of money managers and offering a broad choice of portfolio asset classes and simplified asset allocation tools. Of course, surrenders of taxable amounts may be subject to ordinary income tax and, if prior to age 59, may result in an additional federal income tax penalty.
Appropriate asset allocation, although it does not guarantee a profit, is key to the success of any financial plan, and it is important that clients understand its benefit to long-term investors. Asset allocation models are provided for all levels of risk tolerance through most of todays state-of-the-art variable annuities. Top manufacturers provide sophisticated tools for managing investment options.
Whether the choice of underlying portfolios is institutionalized through a third party or hand- picked by the financial advisor, asset allocation in a well-diversified portfolio potentially can deliver results. If clients have the right asset allocation, the long-term results of the market potentially can do the rest. And, if the client is concerned about the short-term effect of market volatility, the advisor should then determine if it is appropriate to add an optional living benefit to the contract.
Optional Living Benefits Offer Additional Protection