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.
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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.