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May 13, 2015 at 08:45 AM
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.
