Many financial planners have often proclaimed annuities a bad deal for their clients, citing high fees, complexity, or restrictions on removing their money among other reasons to keep their clients’ money in stocks or bonds. Harold Evensky, a prominent financial planner based in Coral Gables, Fla., used to be one of those advisors against annuities. This month he has been quoted in Fortune magazine speculating that he might himself annuitize part of his own portfolio. Why? “I come from a long-lived family,” he said.
This article repeats often stated reasons annuities may be right for many clients as part of an overall retirement strategy. While not all of Evensky’s reasons are the same as the ones we as advisors might agree with for our clients, let’s look at some of the basic advantages annuities might have for many of our clients.
How can they protect their assets?
- Problem: How can your client increase their income without decreasing the safety of their investment?
- Suitable Solution: We are all familiar with the old saying “Don’t put all your eggs in one basket.” Suitable diversification of assets in an annuity could add to the safety of your client’s portfolio.
- Problem: They invested in bonds to protect their savings and receive regular interest income. They didn’t realize that when interest rates increase, the value of their bond principal would decrease.
- Suitable Solution: With a bonus annuity, it may be possible to increase your client’s principal immediately, thus helping them recover losses on their bond portfolio and protecting 100 percent of their future principal.
Locking in stock market gains
- Problem: Lately, market investments have performed well. They are concerned that the market won’t continue its upward trend forever.
- Suitable Solution: To offset the effects of inflation, an annuity could offer potentially higher benefits as a result of compound interest.
How can they make sure their money will be available when they need it?
Liquidity: “Can I get some of their money out without paying penalties or charges?”
- Problem: Many financial accounts charge penalties for withdrawals before maturity on the entire account value. But consumers may want to be able to withdraw some money when they need it without paying excessive penalties or losing up to six month’s interest.
- Suitable Solution: Annuities have many guaranteed flexible withdrawal options that may allow them to take money out of their account without paying any penalties or charges. They could receive free withdrawals that may be tailored to meet their financial situation.
How can they reduce their expenses?
Federal income taxes
- Problem: Interest income earned on checking accounts, savings accounts, CDs, stock mutual funds, bond mutual funds (except for special tax-free funds), T-bills, and dividends on common stock may all be taxable by the federal government each year when interest is credited…even if they don’t take it out!
- Suitable Solution: Interest income credited to their annuity is not currently taxable by the federal government. They may not pay taxes on their annuity interest income until they take it out of their annuity, but usually at lower income tax rates.
Investment effects on Social Security benefits
- Problem: Interest income earned and credited on most investments such as mutual funds, savings accounts, CDs, bonds, etc. may be reportable as income, which may increase their income tax on Social Security.
- Suitable Solution: Interest income earned and credited on an annuity usually is not subject to either federal or state income taxes until taken out of the annuities. Such interest income is tax-sheltered and authorized by the Internal Revenue Code. When they finally take their money out of their annuity, depending upon the income option they choose, up to 85 percent of their monthly income may not be subject to any income taxes. Thus, fewer taxes will be paid and more of their Social Security income benefits could come through to them.
Charges & fees