The first wave of the enormous baby boomer generation is nearing retirement. Following the tenets of our industry, many boomers have invested for their golden years. Now, boomers’ need to draw income from retirement investments is increasing. The immediate annuity could be an option to help your clients with these impending concerns.
Weighing The Facts
Consider: The elderly population is expected to increase by 17% to 39.4 million in 2010 from 33.5 million in 1995. And in 2011, the first of the 77 million baby boomers will turn 65.
Clients have many concerns as they plan for retirement, such as the possibility of outliving their assets and watching inflation and income taxes erode their retirement investment sources.
The federal government suggests that most retirees will need approximately 70% of current income to maintain their pre-retirement standard of living. Also, clients’ expenses will shift during the different stages of retirement. For example, in the early years of retirement, the retiree’s work-related expenses, family-related expenses, home mortgage costs and income taxes generally decrease.
However, expenses for travel, recreation and hobbies may increase. During the middle retirement years, some recreational expenses may lower. In later years, income needs are generally determined by health care costs, including the possible need for long term care.
Features And Benefits
The immediate annuity can meet the ever-changing needs that clients face during retirement. The product has a large effect on the financial services industry. For example in 2004:
o Deferred assets that were annuitized reached $8.2 billion.
o Immediate annuity sales totaled $5.6 billion.
From a product standpoint, an immediate annuity can offer security through guaranteed lifetime payments. The ability to receive a lifetime income is especially important, considering a male age 65 has about a 50% chance of living past his 85th birthday and a 33% chance of reaching his 91st birthday.
A female age 65 has a 65% chance of living past her 85th birthday and a 44% chance of reaching her 90th birthday. Even more astounding, the probability that either a husband or wife age 65 will reach age 90 is 63%!
Another intriguing benefit of an immediate annuity is its ability to provide preferred tax treatment through the exclusion ratio. For example, as the client receives each payment, a portion is a return of basis and the remainder is gain, which is taxable at ordinary income rates. This helps to ease the client’s income tax liability.
Additionally, because the client is not taxed on the investment earnings until withdrawn, the investment earnings grow faster. Lastly, an immediate annuity, when purchased prior to age 59 1/2 , can offer early withdrawal of assets without a tax penalty. Under IRC Section 72(q), annuity payments received no less frequently than annually under an income option for life or for the life expectancy of the annuitant are exempt from the 10% IRS tax penalty for withdrawal prior to age 59 1/2 .