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When An Annuity Makes Sense


For those approaching retirement, there are few things more unsettling than a volatile stock market. With the recent wild market swings, conversations between investors and advisors often revolve around protection options, reducing risk and establishing a guaranteed source of income. Because many investors experienced double-digit growth in their portfolios in recent years, now might be the best time to discuss and explore annuity products that provide certainty and guarantees.

Annuities were originally designed to simply provide a guaranteed source of income in retirement, but over time, these financial tools have transformed and are now available in a variety of shapes and sizes. It is important to note that not all annuities are appropriate for all consumers; one size does not fit all. So when is an annuity the right choice? Here are three cases, presented by the experts at ThinkAdvisor, when considering an annuity is most appropriate.

Case #1: Must Have Income

Jason is a 67 year old male married to his 66 year old wife, Laura. Both are retired with combined investable assets of $2 million, 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.

Jason and Laura have worked with their advisor to create a retirement budget of $11,000 a month, or $132,000 annually. Neither have any guaranteed source of income outside of Social Security.  The estimated annual Social Security payment for Jason is $26,000 and Laura’s is $31,000, which means they will need to draw down roughly 3.75% of their investable assets to provide the remaining $75,000. Jason and Laura have mentioned to their advisor that they would like to increase their guaranteed income sources to help reduce the chance of outliving their assets.

A variable annuity with a guaranteed lifetime withdrawal benefit is designed to provide a non-annuitized income stream for as long as either client is alive, making it a viable option for the couple. This annuity solution would increase the couple’s guaranteed income by 51%, from $57,000 to $86,000, reducing the needed drawdown by approximately 18%, from 3.75% to 3.07%.

Case #2: Safety of Principal

Patrick, 55, and Kathy, 51, are approaching retirement and are interested in reducing their investment risk. While Patrick is comfortable with some risk, Kathy is very conservative and is always worried about balance fluctuations. Together, the couple has saved $1.5 million over the years, spread across qualified accounts and a JTWROS account. In addition, Kathy worked for the state and will receive a modest pension when she retires.

Current income is not a primary requirement for Patrick and Kathy so the couple is interested in exploring avenues to generate a return on their existing assets while deferring taxes, all without the risk of losing what they already have saved. They are about 8-10 years away from retirement. In exchange for safety of principal and the potential to earn an annual return of 4-to-5 percent, the couple is interested in investing about 10% of their JTWROS account assets.

A fixed-indexed annuity without a guaranteed income rider could provide Kathy and Patrick growth potential, safety and an opportunity to take advantage of compounding returns. In comparison to other investment vehicles, this type of annuity can offer competitive rates and strong guarantees. By committing to a five-year lockup period and a cap on maximum return, Patrick and Kathy can avoid negative returns in the S&P 500 Index while still participating in a portion of any upside gains.

Case #3: Death Benefit Accumulation

Britt is recently widowed and has three adult children, two of which are well-off financially. The third, however, has struggled to build a portfolio. Britt is a conservative investor with $1.5 million in investable assets. She was the beneficiary of her husband’s life insurance policy when he passed away a few years ago and used those proceeds to pay off her mortgage to become debt free.

Britt is very interested in leaving all three children an inheritance and wants to build some certainty around that. While she wants the opportunity for growth, she has expressed to her advisor that she would like to protect a portion of her assets. She is unable to obtain life insurance coverage as a recent cancer survivor.

Regardless of how the market performs, a variable annuity with a guaranteed death benefit can provide her peace of mind. In addition to guaranteeing the death benefit, the balance will grow for 15 years (7% annually) or until 200% of the initial premium is reached. Additionally, each of Britt’s children will be able to select how they would like to receive their portion of the death benefit: lump sum, distributed over 5 years or stretched over their lifetime.

When used appropriately, annuities can serve a vital role in a financial plan, but it is absolutely critical to consider them carefully, on a case by case basis when discussing them. Risk tolerance, time horizon, potential tax consequences and financial goals should all be investigated and considered. When these elements align with an annuity solution, nothing can beat the guaranteed peace of mind provided by these financial tools.

For more information about annuity products, visit www.annuityfyi.com. Questions or concerns? Contact us at 1-866-223-2121 or send us an email at support@annuityfyi.com.

Written by Rachel Summit

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