Should These Clients Buy an Annuity? Two Case Studies

Depending upon when they claim Social Security and their pensions, their gross monthly income could be up to $9,000 per month. This, along with significant balances in their retirement plans plus assets in a taxable investment account, could well be sufficient to meet their income and cash flow needs in retirement without an annuity.

An experienced advisor would dig more deeply into Joe and Mary’s situation. How does their seemingly solid monthly income dovetail with their longer-term retirement planning? Based on this analysis, an annuity could emerge as a viable option for them.

Some factors to consider:

• What happens when a spouse dies? It’s important to look at this scenario for each spouse in terms of cash flow.
• What do survivor benefits look like for each pension and for Social Security?
• What does the couple’s tax situation look like once they begin tapping into their tax-deferred retirement accounts?
  

If the couple is concerned about running low on assets later in life, they might consider buying a qualified longevity annuity contract in one of their retirement accounts. The contract, inside a 401(k) or traditional IRA, allows the account holder to contribute up to $210,000 (for 2025 indexed for inflation) to a deferred annuity whose distributions commence as late as age 85. It can be set up as a joint contract to provide income even after one spouse dies.

A QLAC would allow Joe and Mary to avoid required minimum distributions on the amount deferred until they reach their predetermined start date. Besides reducing RMDs for a number of years, a QLAC can provide a reserve against losses in their retirement accounts in the event of a prolonged market downturn. The product, then, can offer both tax savings and a degree of longevity insurance.

Significant Age Gap

In the second scenario, let’s look at Bill, who is 65, and Joan, who is 50. This is Bill’s second marriage, and he has children from his prior marriage. This inherently complicates his estate planning.

Bill is an engineer, and Joan is a corporate accountant. Their combined annual income is about $180,000. Both spouses contribute the maximum to their employers’ 401(k) plans and as such have significant balances in their accounts.

While Bill will be retiring over the next couple of years, Joan plans to work for the foreseeable future. The plan is for Bill to defer claiming his Social Security benefits until age 70 to provide a larger potential survivor’s benefit for Joan.

With their blended family, Bill has designated some assets for his children in addition to assets for Joan. While they do not foresee any income or cash-flow issues as Bill moves into retirement, they are seeking guidance to help ensure future income, including in the likely event that Bill dies first.

An annuity can be part of the solution in multiple ways.

• The couple can consider either an immediate or deferred annuity to provide income once Bill retires and after his death and for Joan via a survivor benefit.
• They may want to consider a deferred annuity for Joan to provide additional income, assuming that she outlives Bill.
• And either or both Bill and Joan might consider a QLAC in their retirement plan. Again, the product can be set up as a joint contract to support whichever spouse lives longest.