Given the variety of annuities available, it’s not surprising if clients need guidance in matching the right product to their needs. I spoke with Michael Kelly, an experienced annuity advisor with Kelly Financial Group in Palmdale, Calif., to get his insights on the process. Retirement Advisor: How do you start the process of determining if you should use an annuity with a client?
Michael Kelly: There are two factors that determine it. Number one is the classification of the money: Is it qualified or non-qualified? That’s a huge issue.
Number two is time. You know, the time is the critical factor in any kind of planning. How long are you putting the money away for? How long before you’re going to access it or take money out and, then, in addition to that, what’s the method that you’re going to use when you take it out? Are you planning on taking it out as a lump sum? Do you want it as an income stream?
So, time is really critical. With annuities, for most of the clients that I use annuities with, it is qualified money, money that is already been put away on a pretax basis. It grows tax deferred. It’s going to be coming out taxable. Typically when you have that type of money in a lump sum, you don’t want to take it out all at once because then it throws you into a higher tax bracket. That lump sum will come out on top of whatever income you have. So, typically, qualified money comes out as an income stream.
There’s nothing mathematically that can beat an annuity for a guaranteed income stream. So, if you have qualified money and you have the time for it to grow then it’s a great place to put money. RA: There are different types of annuities: fixed, variable, etc.?
Kelly: Again, time is a critical factor. With variable contacts, i.e. those that have mutual funds in them, many of them have very short surrender charge periods, as low as 3 to 4 years. So, it’s a good place where you can put money and have it grow but be able to move it in 3 to 4 years.
Your fixed type annuities that have a guaranteed interest rate typically run on a 5-year basis, 3 years, 5 years and 10 years; so, depending on the time the client wants you could put the money away for 5 years, get a guaranteed 3 percent, which in today’s market, I hate to say, is a good rate. RA: Can you share examples of how the process works with clients?
Kelly: It really depends on what they’re trying to accomplish. We use a lot of fixed index type annuities for income and for the longer term.
If somebody is 45 years old or 50 years old and they say, you know what, this is qualified money, I’m going to turn it on as an income stream when I’m 65. I want to get some guaranteed rates, I want to get some guaranteed growth on it and I want to have it come out strictly as an income, then an equity indexed annuity typically can provide you the best returns.
You can get a guaranteed 6.5 percent rollup rate for a 20-year time period and depending on their age either a guaranteed 5 or 5.5 percent payout for the rest of their lives. Mathematically, having those guarantees are what a lot of people like. On your variable contracts, they typically have to be willing to assume risk because you have unlimited upside but you also have unlimited downside and a lot of people in today’s financial marketplace don’t like the sound of the downside risk.
But, if you have time, historically if you’ve got 10 to 20 years to let that money grow, the markets always come back and they always do well. It really depends on the agent that’s managing the money and making sure that the asset allocation internally is appropriate and also minimizing fees. Variable annuities do carry extra fees that can be excessive at times.