In a previous article, I discussed some of the factors influencing annuitization. Deciding to annuitize is just the first step, however, because your client must then choose an income payout option. That can be a daunting task because of the multiple payout options such as single life; joint life; period certain and the variations within the options.
It’s an important decision that’s often irrevocable. I asked several financial advisors with extensive experience counseling clients on this decision about how they guide clients.
Steve Plewes, CHFC, AIF with Advisors Financial Group in Bethesda, Maryland approaches the payout decision as part of an overall planning strategy to provide a level of guaranteed income for clients. He considers clients’ family history and life expectancy.
Plewes, a Million Dollar Round Table (MDRT) member, also factors in other sources of reliable income available to the client, such as pensions and Social Security, because those amounts influence how much income the annuity needs to provide cover basic needs. When there are two persons depending on the income, the analysis includes the survivor’s projected needs and income, he adds.
Shelly-Ann Eweka, CFP, ChFC, financial planning manager with TIAA-CREF in Denver, Colorado, also emphasizes the importance of including survivors’ long-term needs in choosing a payout. Some annuitants focus largely on the income differential between single life and joint life annuities, she says, and that can cloud their judgment. For example, if the single life option pays $650 monthly and the joint life pays $400, some clients will object to the $250 reduction, even if the joint option is best for their family’s security.
Another scenario to plan for is the decrease in household Social Security income when one recipient dies, she says, because that death leads to an often-unexpected income reduction for the survivor. “Another factor that a lot of people don’t think about is that upon the first death, one Social Security check is gone,” she says. “Even though the survivor will most likely get the higher of the two checks, still, one check is gone.”
Clients also need to balance the desire for income with the need for liquidity and flexibility, says Plewes: “What are the liquidity options from this insurance company? What other types of death benefits would be available in case you did choose something like an immediate life-only annuity without a period certain? Is there flexibility in the payment amounts?”
As an example of flexible versus fixed payments for the payout’s duration, he points out that some insurance companies give annuitants more choices. “A lot of insurance companies will allow you to stack the payments a little bit higher in the early years while you might be waiting for Social Security,” he says. “Then you’d have a smaller payment later in life once your pensions and Social Security kicked in or you might want to do it the opposite way. You might want to ask the company if they would give you a lower payment now for a few years while you still have a business or rental income or things like that are still active and, then, increase it later in life.”
It’s also worth inquiring about inflation options, he adds. Although inflation-adjusted payouts start smaller, the benefit will increase over time, offering a degree of purchasing power protection.