Your clients may be missing out on one of the best ways to grow their money: annuities.
That statement may have provoked a startling gasp or groan out of you. Many brokers and advisors already have strong feelings about annuities, but because of those feelings, clients could be suffering financially.
Annuities are often overlooked because clients assume interest rates are going to rise or think annuities don’t offer an attractive-enough return. Instead of putting money in a five-year annuity, this leads to clients putting their money into short-term vehicles like savings accounts, money market accounts, one-year certificates of deposit or one-year Treasuries. On the surface, this makes sense.
However, if you dig into specific examples, you’ll quickly see that these assumptions are inaccurate.
Breaking it down
In 2007, many people were attracted to the one-year Treasury’s interest rate of 5%. Thinking that was their best option, let’s say a client put $100,000 into a one-year Treasury. Looking at the available yields at the beginning of each year for the next five years, that money would have grown to $109,568.
Now, in comparison, let’s say that client put the same amount, $100,000, in an annuity with a 4.25% interest rate guaranteed for five years. That may not have looked as attractive as the one-year Treasury at the time because of the difference in interest rates; however, five years later, that money would have grown to $123,134.
Why? Because interest rates on the one-year Treasury declined significantly from 2007 to 2012. In fact, the interest rate at the end of the fifth year was 0.29%; whereas the annuity purchase would have locked in the 4.25 interest rate for five years.
Ultimately, if that client had purchased a one-year Treasury instead of the five-year annuity, they would have missed out on $13,566.
Helping clients look beyond one year
As a trusted partner, you can help your clients evaluate their options long-term and determine the best way to grow their money. In most cases, this should include looking beyond the typical one-year Treasury or certificate of deposit options, ensuring you’re not overlooking better ones.
Taking into account your client’s long-term financial goals, two areas are key for providing strategic counsel:
Clients are often easily influenced by interest rates in the moment and what is being said about them increasing or decreasing in the near future. However, they often also misunderstand how those rates are set, assuming they’re being set by the government. Government-set interest rates for banks may influence annuity interest rates, but that’s where it ends, so they shouldn’t deter clients from looking at annuities.
Because of this, it’s important that you counsel your clients on the timing of purchasing an annuity. It shouldn’t be solely based on what they’re seeing or expecting from interest rates. Instead, it’s pertinent not to wait so clients don’t miss out on potential earnings.
Many clients don’t understand annuities or count them out as an option based simply on the interest rate. They will often stick to what they know, like savings accounts and certificates of deposit. However, annuities are similar to these options in their safety but are more sophisticated in their commitment. Clients who are willing to make the longer-term commitment that an annuity requires can be protected from risk — such as dramatic fluctuations in interest rates as noted above.
When it comes to annuities, your counsel may be the only way clients can realize the opportunity an annuity can provide for growing their money. By working through the timing considerations and helping your clients look for savings options outside their comfort zones, you can better help them understand the big, longer-term picture and consider all options that are applicable to their goals.
— Read 3 Ways Fixed Annuities Can Outperform Bond Mutual Funds, on ThinkAdvisor.
Chris Conklin is vice president of individual annuities at The Standard. He is a Fellow of the Society of Actuaries and a licensed agent. He also also co-owned a national marketing organization.