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The Role of Annuities in a Comprehensive Retirement Portfolio

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What You Need to Know

  • The pandemic has increased the percentage of older workers who say they have retired.
  • Uncertainty about the future has increased.
  • Annuities can help clients shift interest rate risk.

The pandemic has given us all historical pause while causing widespread change, especially across the workforce.

A 2020 economic study uncovered information that suggests many older workers chose early retirement because of the pandemic, with 60% of people who left the labor force through early April saying they were retired, which is 7% higher than reported in January before the pandemic took hold in the U.S.

Experts also expect that the pandemic will affect the timing of retirement for many older workers, whether voluntarily or because of job elimination or “unavoidable health risk.”

Since how long someone works is one of the primary factors affecting retirement security, an uncertain timeline means more clients are considering their retirement plans and how to best prepare. When creating a retirement portfolio, annuities are a worthwhile option for guaranteed income.

While many in the industry may be well-versed in the numerous benefits annuities can provide, for those who are just beginning to learn about them, or for advisors speaking with clients about annuities for the first time, it’s helpful to start by discussing what makes them a viable option, for whom and when.

These answers can all provide context into why they’re a necessary part of a comprehensive retirement portfolio.

Understanding Retirement Goals

While the future has always been uncertain, that’s even more true now. As data suggests, people are more seriously considering early retirement, or whether to put off retirement longer, as economic benefits increase after the age of 65. Because of this, pre-retirees and retirees are thinking through how they want to live in retirement and what is actually achievable.

When building a retirement plan, oftentimes people first look at how much money they have and ask how far it will get them; however, doing the opposite can be more helpful. Instead, by first asking how much they need in retirement, it will provide insight into how to save for it.

For example, a client can determine the annual income they would like to have in retirement, and then determine how much they need to save by when in order to reach that.

When putting together a comprehensive retirement income plan, clients should consider their age, timeline to retirement, how much they have saved, how much they need based on their timeline and their retirement goals.

Advisors can help guide them through this evaluation process, and also look at existing expenses compared to desired retirement lifestyle goals. With these answers, advisors can help clients determine a strategy and how to diversify a portfolio.

Securing a Portion of the Portfolio

A retiree’s goal is likely to reduce the risk of losing critical savings during retirement while also boosting income potential. Having annuities as a portion of a portfolio can help achieve these goals. When putting together an investment plan, diversification is a worthy strategy.

Retirement income can benefit from a comprehensive portfolio across various types of investments. Helping clients see that annuities are a great option for those looking to build and protect their assets can ensure they have predictable returns as part of their portfolio.

This method can also help inform decision making. Expectations around growth and withdrawals give insight into the type of income clients may anticipate and need.

Traditionally, retirement contributions may also be split among investments like stocks and bonds, depending on a client’s risk tolerance and all of the factors previously mentioned. But because of the nature of these investments, it is important to remember that they are not guaranteed income like annuities are.

Where the annuity differs is in its assurance. Some fixed annuities can provide principal and interest rate guarantees, or a predictable income stream and guaranteed payments for the annuity holder.

They are a long-term income replacement plan across a fixed amount of time, per the client’s choosing. This helps reduce the odds that someone will run out of money in retirement — depending on various factors, of course.

Because an annuity is guaranteed to the holder, the investor gets the benefit of the insurance carrier taking on the risk of interest rate changes. It’s good practice that the older one gets, the more they should offload interest rate risk because it can affect their income.

In retirement, people need that income to be predictable. Since annuities are guaranteed, allocating a share of one’s investments to them can allow for a balanced portfolio when combined with other investments, like equities.

How to Work Annuities Into a Portfolio

Asset allocation decisions are best made with a comprehensive retirement plan that takes into account several factors and personal goals. Advisors can be a partner to their clients through these decisions and by providing context into how adding annuities into a portfolio can provide predictability, balancing more aggressive investment options.

In determining what percentage of their portfolio to allocate to annuities, advisors can guide the conversation around their client’s personal goals, other income strategies and risk tolerance.

A good starting place is whether a client wants to be conservative, moderate or aggressive in their portfolio overall. From there, the advisor can help by suggesting the right mix of annuities and other investment options to balance the individual investor’s specific needs. Then it’s about choosing the right type of annuity for the client.

It’s rare to have an economic downturn while the stock market is mostly unaffected. It’s also a good reminder that with a well-diversified portfolio, people may see difficulties or lags in one area while profiting from guarantees in others. This is why diversification can be so key.

Coupled with a pandemic that has made many people re-evaluate their goals and plans for retirement, advisors can use this opportunity to proactively connect with their clients, ask what their financial situation is and what they want in the future.

Predictable investments are a key strategy in a long-term savings plan, and fixed annuities are a good option for complementing that balanced portfolio.


Pen (Image: iStock)John Williams is the regional sales director, individual annuities at The Standard.

(Image: Shutterstock)