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Portfolio > Portfolio Construction

Why An Immediate Annuity Should Be Part Of Your Client%apos;s Portfolio

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File: L43Venard. Lines: 152. Let’s do the charts below as two separate SMALL ones. Run with pic and bio. Her pic is in sharepoint week 41 under Nationwide photo.

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:

? Deferred assets that were annuitized reached $8.2 billion.

? 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 .

Immediate annuities can provide clients with a sense of control that other investment vehicles cannot offer. For instance, clients can access funds through a full or partial withdrawal option. Many immediate annuity products include a withdrawal option with certain income options.

This feature provides access to the client’s money should a financial emergency arise that cannot be met with the regularly scheduled payments. Withdrawals will reduce the client’s periodic payments for the length of the term certain period.

Many immediate annuity products include an optional death benefit feature, which provides additional protection for family members. Death benefit options generally vary depending on the income option selected.

In addition, immediate variable annuities can provide clients with a variety of investment portfolios with potential to outpace inflation. Clients can also re-allocate investment options during payout.

Variations of annuity offerings

The fixed immediate annuity option is one variation. If the client elects a fixed immediate annuity, the dollar amount of the income payment is known. There is no fluctuation of income over time, regardless of market returns, interest rates or how the economy fares.

An unscheduled withdrawal or the death of an annuitant, however, can affect the amount of the client’s income payments. Also, fixed income does not provide a hedge against inflation.

Alternatively, clients can opt for a hybrid, split-annuity strategy that lets them stay invested and secure a guaranteed income stream. You can help them manage market volatility risk through diversification by creating “buckets” of money for income.

For example, simply split the client’s assets into two buckets. Allocate enough money to the first bucket to purchase a term certain immediate fixed annuity, which results in a regular stream of income. The remainder of the client’s assets is placed in a single premium deferred variable annuity.

The deferred variable annuity can grow tax deferred, which may allow for the eventual restoration of the principal. When the income stream from the immediate annuity ends, the client can purchase another period certain immediate annuity and repeat the process.

This technique separates the income assets from the accumulation assets. Additionally, a dependable income stream is obtained based on the client’s income needs.

Help clients prepare to live longer

Your clients must plan for the possibility of living longer. An immediate annuity can help meet their changing needs during retirement years and provide an income they cannot outlive. And by implementing a split annuity strategy, you may help ensure their retirement dreams are realized.

Catherine L. Venard, JD, CLU, is a senior advanced sales consultant for Nationwide Financial and a registered representative of Nationwide Investment Services Corporation. She can be reached at [email protected].

An immediate annuity can help meet clients’ changing needs during retirement years and provide an income they cannot outlive

Potential Benefits of an Immediate Annuity

?Guaranteed lifetime payments- if lifetime annuitization is elected

?Access to assets- unscheduled withdrawals may be permitted

?Beneficiary protection- death benefit protection may be available

?Reduce tax liability- if assets are non-qualified each payment will be a return of principal and earnings

?Stability with growth- choice between fixed and variable payments or a combination of both

Why Consider an Immediate Annuity

?Guaranteed payments for life or a specified period of time

?Make minimum required distributions from traditional retirement plans such as IRAs.

?Leave a legacy by utilizing wealth transfer strategies.

Benefits may vary depending on product and options selected.


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