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3 ways annuities help beat the interest rate blues

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One question I get all the time when I talk with financial advisors is, “How do I tackle the low interest rate environment?” The perception is that all fixed products, including fixed deferred and income annuities (“fixed annuities”), are less attractive when rates are low.

But what many advisors don’t know – and what they’re pleased to hear – is that there’s no reason to wait for interest rates to rise to optimize your clients’ retirement portfolios; fixed annuities can deliver real value to your clients now.  

Your clients are barreling towards retirement whether interest rates go up or not. For clients who are digging in their heels, hesitant to move until rates do, it is important to explain that there is a cost of waiting. Just consider what clients – no matter their risk tolerance – could have earned in the last few years  from equity returns, the interest on a high yield fixed income product, or the payments from an income annuity, instead of waiting on the sidelines.

So what’s a retirement-age investor to do?

Just ask your clients if they have money sitting in conservative investments, and what you are likely to find is that a) they do (there’s over $3.5 trillion in “safe money” assets held by Americans age 55 and over) and b) they want those assets to do more for their portfolios than what the return on CDs can provide. 

Here is what a fixed annuity can offer your clients:

    1. For clients seeking income, payouts in the 6-10 percent range, guaranteed for life.  Where else can they get that safely?
    2. A product that is somewhat shielded from interest rates.  For example, when 10-Year Treasury rates declined 24 percent between May 2011 and May 2014, the payout on a single premium immediate annuity declined just 4 percent. This illustrates how market interest rates are only one component of fixed annuity payout rates and how other factors such as return of premium and mortality help to mute the impact. This mitigation of interest rate risk works both ways.  If you think rates are headed up, then fixed annuities are a way to protect against the destruction that rising rates could do to a fixed income investment.  If you think interest rates are going down, then a fixed annuity is a way to lock in today’s rates.
    3. The ability to bear more market risk with other money.  By putting a portion of assets in a fixed annuity, you’re helping take pressure off the rest of your clients’ portfolios so they can bear more market risk in the hopes of capturing more market return and be better positioned for retirement. Psychologically, they’ll be more confident because of the guarantees fixed annuities offer, but, technically, their portfolios have potential for better return  due to increased market exposure, too.  

 

What types of annuities work best for this type of portfolio optimization?

For investors who need to continue to grow their assets but are still equity-wary (as many are), consider an accumulation product like a fixed deferred annuity with an optional guaranteed lifetime withdrawal benefit (GLWB) rider. It will certainly provide a more attractive yield plus tax deferral benefits and the option for lifetime income.

If your clients are a few years out from retirement or already retired and want to add to their income stream, consider a guaranteed lifetime income annuity. Just as is the case with the crediting rate on fixed annuities, the payout on income annuities can beat many other fixed income alternatives in terms of guaranteed income. That’s because the rates on these products) are based not just on interest rates, but on risk sharing factors too, as I mentioned in point two above. The guarantees on all types of fixed annuities are backed by the claims-paying ability of the issuer, so you’ll want to do your homework to make sure the provider is financially sound and highly rated by the rating agencies.

Conventional wisdom says you should never time the market – the same should be true for interest rates.  So when your clients ask you about tackling the current interest rate environment, now you can be even more confident that you have a solution for them and there is no reason to wait. We have been waiting for rates to rise for some time now. In the meantime, your 65-year-old client – 5 years later – is now 70 and has a greater need for retirement security.

Have other questions about annuities?  Send me an email at [email protected] or check out my next post which will cover more of the annuity questions I often get from advisors.