Annuity FYI Blog

In the Chicago Tribune Article “Annuities can be valuable slice of retirement pie,” Humberto Cruz describes he and his wife’s retirement plan using pension, Social Security, and four different annuities.  Both Social Security benefits and pension payments are forms of an immediate annuity, providing lifetime income at a set monthly amount.  The author and his wife also chose to add four annuities from insurance companies to their retirement plan.  They opted for one annuity that will increase 3% yearly for inflation to go along with the inflation adjusted Social Security payments.  With those guaranteed streams of lifetime income, the couple believes that they will have their basic expense needs met over both of their lifetimes.

They believe that investing in an income annuity is more like insurance than an investment because although you will not gain as much as you could from a riskier investment, you know that your payments will always be there.  Take the remainder of your savings and invest in something riskier to grow your funds even further, but make sure you have the annuity to cover basic expenses.  Variable annuities that include guaranteed lifetime withdrawal benefits are also a good way to generate retirement income.  You have the potential for better returns than with an income annuity, but will probably have a lower guaranteed payout rate.  Some other suggestions the author lists are systematic withdrawals, living off interest or dividends only if you can afford it, and using a bucket approach of splitting your money between short-term and long-term needs.

In Jeff Benjamin’s Investment News article “Five ways to boost retirement income,” immediate annuities are at the top of the list.  The best way for retirees to make the most of the retirement savings they have built is to have diverse yet safe investments that will continue to generate income even in retirement.  By establishing a steady income stream that will carry you through rough economic times, you will be able to have the flexibility to manuever through assets with some risk to generate income in retirement.  Five investments that can help those of retirement age with their steady and reliable income stream are immediate annuities, individual bonds, reverse mortgages, convertible bonds, and master limited partnerships.

As the demand has increased for immediate annuities, they have become easier to understand for everyday investors.  A single-premium immediate annuity is one of the best ways to obtain guaranteed predictable income.  For investors who have already retired, the author recommends a simple no-load version without added riders like death benefits.  While your monthly income from the annuity may seem low, experts recommend using a portion of your retirement savings for an annuity and using that payout for everyday expenses.  Then the rest of your savings can be put towards other income growing investments.  New York LIfe, MetLife, Hartford, Nationwide, and John Hancock are some of the post popular insurance companies that work with annuity products.

In a follow-up hearing to the Labor and Treasury Departments request for information earlier this year, insurance companies want Washington officials to make it easier for employers to offer 401k annuities.  Bloomberg’s article “Insurers Press U.S. to Let Employers Offer Annuities in Retirement Plans” by Margaret Collins provides information on the hearing.  Insurers think that the government needs to provide “safe harbor” protection so that employers are not liable if the insurance company offering the annuity goes out of business.  This protection will allow employers to easily offer annuities as a default investment for their 401k holders.

Even though plan sponsors will not be held liable for the failure of an insurance company, many worry that will be the case and don’t offer 401k annuities.  Annuities offer guaranteed lifetime income solutions to retirees for a lump sum up front payment.  When used with a 401k, some of the employer sponsored plan money can be set aside to purchase an immediate annuity that will cover at least your basic expenses in retirement.  As life expectancies increase and traditional pension plans where workers received retirement payments similar to annuity payouts disappear, many workers will be left unable to cover expenses in retirement.  Prudential and MetLife are two companies offering annuity contributions within 401k plans to help combat this retirement issue.

According to National Underwriter’s “Russell: Many Advisors Want to Pare Client Lists,” financial advisors have an average of 255 clients.  They seem to universally believe that is too many and would like to carry a few less clients.  The average advisor thinks that 228 would be an ideal number.  The recent Russell Investments study found that half of the advisors questioned would like to decrease their client list from an average of 392 down to 211.  The 43% of advisors who said they would like to increase their client lists hoped to go from an average of 140 up to 238.  It appears to be even more difficult to keep up with very high client counts now than it was just a few years ago, partly because of the changes in annuity rates and other interest rates associated with a tumultuous economy.

Most advisors told the surveyors that they are having a difficult time balancing more demands from their clients with a declining revenue and difficult markets.  A long-term solution for this is switching to a fee-based service model, while a short-term change for other advisors includes offering more guaranteed income products like annuities.  Of those surveyed, 39% said that they have been selling more annuities to their clients.  45% of advisors are transitioning to fee-based accounting for their clients.  For those looking to expand their client list, 26% are looking for new ways to find more clients.  While most of the advisors already use annuities for their clients, those who don’t seem to have little interest in transitioning to this guaranteed income product.  Maybe they will change their minds as clients show more interest in lifetime guaranteed income sources.

Whether a deferred fixed annuity or a CD is better for your savings plan depends on a number of individual factors.  You can compare annuities and bank CDs regarding the safety of your principal, the length of term you are looking for, your distribution options, and tax benefits.  Both products are lower-risk than many other options, yet differ from one another significantly.  Your financial priorities and goals will help determine if a deferred fixed annuity or CD is best for you.

Certificates of deposit (CDs) are usually issued by banks and guaranteed by FDIC insurance for $250,000.  Even if the bank issuing the CD failed, your investment should be protected by the federal government.  Equity linked CDs are somewhat like a combination of both products because they have the protection of a CD along with the possibility to gain in a stock market index.  Deferred fixed annuities are backed by the strength of the insurance company that issues them so you want to fully research the financial strength of your insurer.

Deferred fixed annuities are meant for long term investing, while CDs are best used for shorter term goals like saving for a car or down payment for a home.  CDs have a maturity date where you must reevaluate your investment by either turning it to another CD, a deferred fixed annuity, or cashing it in.  With a deferred fixed annuity your distribution options are maintaining an income stream that lasts over your lifetime or leaves your heirs death benefits, cashing it in, or leaving the funds to accumulate until you need them.  CDs are taxed when the interest is earned, even if you haven’t used the money yet, while deferred fixed annuities are not taxed until you actually use the money those earnings were attached to.  Whichever options work best for you will determine which product you should invest in.