Despite an increasingly well-informed client base, there remains no question of the need for the financial professional who can help customers reach their financial goals.
Case in point: the fixed annuity. It’s long been a popular vehicle to convert lump-sum retirement savings into a guaranteed income stream for life. But with interest rates at an all-time low, is now the time to lock into such low returns for life? Probably not.
Yet lifetime fixed annuities are not the only option for the conservative investor to consider. Fixed annuities can still serve your clients well in this market, and it is your duty to know how. When comparing interest rates, the client should first consider liquidity needs. While a CD may be used for short-term or long-term investing, fixed annuities are primarily a long-term investment designed to provide retirement benefits. These two examples show why.
A better interest rate, with accessible cash
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At one 63-year-old client’s annual review, I noticed that he had $25,000 in CDs earning only 0.6% interest. The money wasn’t earmarked for anything in particular, except perhaps travel during his retirement years. Meanwhile, he owned a non-qualified fixed annuity he had bought seven years before with a guaranteed minimum return of 3.5%. As it turns out, additional payments could be made later to the annuity — as I explained to my client — while maintaining the 3.5% rate.
For this client, it made sense to transfer his $25,000 from the CD into his fixed annuity for three important reasons:
- The client’s fixed annuity allowed him to make extra contributions. Note: this is not the case with a single-premium annuity.
- The client would not incur surrender charges should he wish to access the cash at any time. His contract allowed withdrawals without penalty after seven years, and the client had already passed the required withdrawal age of 59½.
- His fixed annuity contract did not have rolling surrender charges, which would have locked up his additional contribution.
This meant that, after the seven-year holding period, he could take the $25,000 out at any time. Meanwhile, he’d earn significantly more than the CD’s interest rate of 0.6%. In cases such as this, it is important to consider the holding period of the CD, as CDs must be held until maturity to avoid penalties.
A client should also be aware that each annuity purchase payment has a specific guaranteed period. The initial purchase payment will receive a specific interest rate, guaranteed for two years. At the issuing company’s discretion, an enhanced interest rate may be paid in the first year on any purchase payment. Any subsequent purchase payments will receive a specified interest rate that is guaranteed for a period of two years. The specified interest rate will be determined at the time of the purchase payment. After the guaranteed period has expired, interest will be credited at a renewal rate and a period determined by the issuing company. The renewal rate will never be less than the minimum allowed by state law at the time the contract is issued. Currently, most renewal rates are guaranteed for one year.
- Annual reviews are a crucial tool when serving your client. In the case of this client, I was able to ascertain that he could earn a better rate and still have easily accessible funds after the required holding period, something he would not have known otherwise. Holding periods and interest rates vary by contract type and issuing company.
- Keep your eyes open for clients with CDs or money market accounts and a fixed annuity. Look into the details of the annuity and check if additional contributions can be made and whether funds can be accessed when needed.
Two buckets, one retirement
In another case, a recently retired 55-year-old client asked that her $500,000 be converted to a guaranteed income stream, ensuring peace of mind. In other words, she wanted a lifetime fixed annuity.