While there’s nothing unusual about volatility in stock markets, the big swings up and down we’ve experienced recently can amplify anxiety for those clients who are nearing retirement. Whether you are planning for the next correction or the next bear market, advisor-client conversations can focus around answering the following series of questions:
- What are the available investment options to protect against a market correction?
- Does it make sense to take some of the gains achieved over the past decade off the table?
- How important is establishing a guaranteed source of income in achieving long-term goals?
- What level of certainty is needed to achieve generational wealth transfer goals?
Making the Case for Annuities
With many clients experiencing double-digit growth in their portfolios over recent years, now may be the right time to explore annuities as they can provide certainty and guarantees for a portion of a client’s investable assets.
Originally designed to provide a guaranteed source of income, annuities have evolved over the years to fulfill particular areas of financial planning. Similar to other areas of the investment product universe, annuities have gone through many transformations, new product developments and enhancements over the last 20 years to keep pace with consumers demanding more from their portfolios.
Today, annuities are available in many different forms but one size does not fit all and they’re not for everyone. It’s critical for financial advisors and planners to thoroughly vet a client’s financial situation and needs to ensure the annuity product selected doesn’t do more harm than good.
However, selecting the right annuity product for the right client situation can be a powerful addition to a client’s overall investment strategy.
When is an annuity the right choice? Below are three different cases for consideration.
Case #1 – Must Have Income
Client Profile: Jason and Laura are a married couple. Jason is 67 years old, his wife Laura is 66 and both are retired. The couple has $2 million in investable assets spread out across IRAs, Roth IRAs, 401(k)’s and a joint-tenant with rights of survivorship (JTWROS) account. Their risk profile is ultra-conservative.
Planning Scenario: Jason and Laura have worked with their advisor to create a retirement budget and together they determined that the couple’s monthly income requirement is $11,000 ($132,000 annually). Neither Jason nor Laura have any guaranteed source of income outside of Social Security.
(Related: Making Retirement Income More Predictable)
The estimated annual Social Security payment for Jason is $26,000 and $31,000 for Laura; which means Social Security will meet roughly 43 percent of their $132,000 annual need. This means that the couple will need to draw down, or cash in, roughly 3.75 percent of their investable assets to close the remaining $75,000 income gap and satisfy their “must have” income needs.
Jason and Laura have mentioned to their advisor a desire to increase their guaranteed income sources to help reduce the chance of outliving their assets.
Suggestion: A variable annuity with a guaranteed lifetime withdrawal benefit. These are designed to provide a non-annuitized income stream for as long as either client is alive and may be a good option.
The suggested solution carves out 25 percent of investable assets ($500,000) and produces a guaranteed joint lifetime withdrawal rate of 5.75 percent, or a guaranteed annual income source of $29,000. When added to Jason and Laura’s Social Security payments, the clients now have nearly 65 percent of their income need being met with guarantees. The remaining income requirement of $46,000 can be drawn directly from their investable assets of $1.5 million, about 3.07 percent of the portfolio.
In this scenario, the annuity with a guaranteed lifetime withdrawal benefit solution increases the couple’s guaranteed income by 51 percent (from $57,000 to $86,000) and reduces the required drawdown on the remaining assets by approximately 18 percent (from 3.75 percent to 3.07 percent).
Case #2 — Safety of Principal
Client Profile: Patrick, 55, and Kathy, 51, are approaching retirement and want to reduce their investment risk. Patrick is young enough and comfortable with some risk, but knows preservation of principal is a top priority in their retirement years. Kathy is very conservative when it comes to investing and is always worried about balance fluctuations and losing value in their investable accounts.
Together, the couple has managed to save $1.5 million over the years; spread across qualified accounts and a JTWROS account they share. In addition, Kathy worked for the state and will receive a modest pension once she retires.