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Retirement Planning > Retirement Investing > Annuity Investing

Is an Annuity the Right Choice for Your Client? 5 Questions to Ask

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What You Need to Know

  • With many employers doing away with their pension plans, annuities can help provide a guaranteed lifetime income option for your clients.
  • An advisor should work with the client to ensure that an annuity is a fit with their overall retirement strategy, and if so, what type.
  • Annuities can carry high costs and are not the right solution for all clients.

Helping your clients formulate a retirement withdrawal strategy to meet their retirement income needs is one of the most important aspects of the retirement financial planning work you do for them.

One of the options that clients may express an interest in — and that advisors may sometimes recommend to clients — is annuities. Here is a look at the factors to consider when deciding if an annuity is the right choice for a client, and, if so, what type.

Review Current Sources of Retirement Income

Clients generally have a range of assets that can be tapped for retirement income, including taxable investment accounts, IRAs, employer-sponsored retirement plans, interest in a business, cash, CDs and savings accounts.

Additional sources of income might include Social Security, a pension and income from either a full- or part-time job.

These potential sources of retirement income should be viewed in light of the client’s retirement spending and their income needs. It’s also important to consider their tax situation in retirement, as well as their estate planning needs. This review might lead you to look at an annuity as part of your client’s retirement income strategy.

When Can an Annuity Help?

With many employers doing away with their pension plans, annuities can help provide a guaranteed lifetime income option for your clients. For some clients, annuities can fill in the gap left by a lack of a pension benefit.

Annuities can also serve to fill a client’s needs in a number of retirement and related areas. You want to work with them to ensure that an annuity is the best choice for their specific needs, and if it is, you pick the best type of annuity for their situation.

Here are a few options you might consider:

Qualified Longevity Annuity Contract

A qualified longevity annuity contract (QLAC) is a deferred annuity that can be purchased inside an employer-sponsored retirement plan, such as a 401(k), or an IRA account.

The main planning benefit of a QLAC is the ability to defer a portion of the assets in the account out as far as age 85 via a deferred annuity. This can help ensure that your client has an income stream left later in retirement should their nest egg be depleted by overspending or a pronounced market downturn. The premium dollars used for the QLAC will not be subject to required minimum distributions until the annuitization commences.

Lifetime Income Annuity

A lifetime income annuity can offer guaranteed income for life. There are several varieties, including immediate and deferred fixed lifetime income annuities. These annuities can fill an income gap for clients where needed.

Income for Beneficiaries

An annuity can be a solid vehicle to provide guaranteed lifetime retirement income for a spouse or other beneficiary. Depending upon your client’s situation, an annuity can offer a solution to the issue of providing guaranteed lifetime income for both spouses. This can be critical if one spouse is the primary earner and accumulator of retirement assets.

Customization via Riders

Many annuities can be customized via riders or contract add-ons. Riders may address concerns such as inflation or offer a minimum income level or maximum loss for the contract.

Downsides of Annuities

Annuities have their downsides as well. These can include:

  • Cost. Annuities can be expensive. Some contracts have high internal expenses and may have onerous surrender charges.
  • Commissions. In some cases, annuities can incur high sales commissions for the selling agent or registered rep.
  • Penalties. If your client needs the money before age 59 ½, they could be subject to an early withdrawal penalty in addition to any taxes or surrender charges they would incur.

Your clients may know an annuity salesperson through their church or another social group. This individual may use that relationship to convince your client to purchase an annuity from them.

As with any financial product, urge your client to consult with you or regarding the purchase of an annuity before making a decision. This will help ensure that the annuity is a fit with the client’s overall retirement planning and doesn’t conflict with the planning work you have done for them.

The Right Financial Tool?

Annuities have a number of attributes that may benefit your clients. Just as a household repair or building project requires that you select the right tools for the job, be sure that an annuity is the right financial tool to use as part of your client’s retirement income planning strategy.

Some questions to explore with your client include:

1. Does your client need another source of guaranteed lifetime income?

Most of your clients will have at least one source: Social Security. In the process of helping your client decide if an annuity is a good addition for them, be sure that you have worked with them to maximize their Social Security income stream. This includes delaying when they claim benefits and taking steps to maximize a survivor’s benefit in the case of a married couple.

2. Does the client need an additional tax-deferred income source?

If your client is still working and is maximizing contributions to their employer-sponsored retirement plan and to an IRA, an annuity might be a good way to invest additional amounts that can grow on a tax-deferred basis until tapped in retirement.

While assets in a nonqualified annuity are subject to taxes when annuitized or distributed, they will grow on a tax-deferred basis inside the contract until distributions are made.

3. How will an annuity affect their tax situation?

Distributions from an annuity are subject to taxes, either via the exclusion ratio when annuitized or taxes on the portion of a lump-sum taxable distribution. Distributions from a traditional retirement account are taxed in accordance with the rules governing that type of account. Do the benefits of an annuity override the tax implications?

4. Is downside risk in the markets a major concern?

We are currently going through a sizable market correction. Annuities can provide protection against a prolonged market downturn. However, for a client with a sizable nest egg, proper diversification can offer downside protection without any of the restrictions of an annuity.

5. Is liquidity a consideration?

Annuity contracts vary by type and across the insurance companies issuing them. One thing most have in common is that if your client needs to access their money during the first few years of owning the contract this can trigger surrender charges or other fees. Additionally, there can be tax or early withdrawal penalties.

Note that some annuities come with a guaranteed withdrawal rider, but this also comes at a cost. If your client might need to access the funds during the first few years, an annuity may not be the right answer for them, at least at this time.

Annuities can be a solid addition to your client’s retirement income planning strategy. Be sure that you work with your client to determine if an annuity is a good fit. If so, they will need your expertise in selecting the best type of annuity, including any riders as well as the lowest cost annuity from a solid insurance company.

Roger Wohlner is a financial writer with over 20 years of industry experience as a financial advisor.


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