In my last post I discussed how, despite conventional wisdom, income annuities can be a smart buy even in today’s low interest rate environment.
The link between income annuities and interest rates is just one of a handful of myths that often cloud advisors’ and clients’ consideration of these annuities and why many write them off too soon.
A closer look reveals that these myths are easily overcome. This opens the door to a new income asset class for those planning for retirement.
Myth: If you pass away early, the insurance company wins.
Fact: Clients benefit from an income annuity no matter how long they live and the majority of clients ensure their premium with a death benefit option.
Clients will benefit from an income annuity whether they live four or forty years after they start receiving income.Why? Income annuities typically provide payout rates in the 6 to 12 percent range (which includes return of premium), depending on the type of product.
So, while you’re living, this higher payout is going right to you, exceeding the payout from other strategies such as a non-guaranteed systematic withdrawal plan or interest from other investments.
You’ve also given yourself the security of knowing that you will have a sustainable stream of income for life, guaranteed. And if you do pass away, the income that would have gone to you is not put back into the insurance company’s coffers but instead, because of risk pooling, supplements the income of those who live longer than expected.
If there are lingering concerns about someone other than you or your family getting your money, rest assured that most income annuity payout options provide the opportunity for a death benefit. In fact, the vast majority of policies are purchased with some sort of death benefit option. The death benefit option does reduce the payout, so a conversation about income and legacy goals can help identify the best option.
Myth: Working longer is the only way to hit your retirement income goal.
Fact: With proper planning, many clients can retire when they want to.
While most rhetoric today speaks to the need for pre-retirees, en masse, to work until well towards age 70 or later, a recent study conducted on behalf of New York Life found that 46 percent of retired Americans with $100,000 or more in investable assets would have retired an average of four years earlier, assuming they could have achieved the same level of financial security they had when they did retire.
So if leaving the workforce while they’re healthier and more active is a goal for clients, an income annuity can help make a secure retirement possible. Income annuities – whether purchased to start paying out income right away or used to create a stream of income in the future – can help provide the security of knowing that expenses will be covered, and can help folks retire on their own terms, when they want to.
Myth: There is no liquidity once an income annuity is in play.
Fact: Since income annuities are generally purchased with just a portion of a portfolio, liquidity should not be an issue.
The tradeoff for the high lifetime income these products provide is often limited liquidity. This allows the insurance company to invest premiums prudently to guarantee those payments will always be there. That is why you would never allocate all – or even most – of a portfolio to an income annuity. Instead, you should consider using just a portion, in a sum adequate to guarantee the desired amount of income. Dedicating a portion of assets for income reduces pressure on a portfolio overall, allowing it to be more liquid, potentially more aggressive, or otherwise tailored to the clients’ objectives.
And, most products offer options to access money beyond their scheduled income payments in the event additional funds are needed for unexpected circumstances. In practice, though, we see low utilization rates of these features. This reality echoes 2013 research from State Street Global Advisors indicating that, in ratios of four to one, defined contribution plan participants prefer stable income versus access to cash during the distribution phase.
Myth: If clients already have enough retirement income, they can pass on more.
Fact: More guaranteed income can make all the difference.
It is true that for certain affluent clients, a well-positioned portfolio, Social Security, and pension (less likely for younger Boomers) income may be able to provide an adequate level of income for retirement, but there is a strong case for the value of not just more income, but more guaranteed income.
Guaranteeing a stream of income to cover retirees’ and pre-retirees’ expanding list of basic expenses is a way to provide peace of mind. Last year, Research Magazine reported that retirees get more satisfaction from spending Social Security and pension income – income that’s guaranteed to last for the rest of their lives – than any other sort of income.
Guaranteed income from an income annuity can provide the peace of mind a pension once provided. We see younger pre-retirees purchasing deferred income annuities, for example, to achieve just that. More guaranteed income can be the means to a more fulfilling retirement.
The good news is that more advisors are picking income annuities for their clients.
In fact, the income annuity market grew by about 20 percent last year according to LIMRA. Dispelling these myths should help more advisors and clients understand that annuities are a winning addition to their retirement plan.