One of the challenges that agents and advisors face when presenting income annuities to clients is how to help customers understand what factors impact retirement income outcomes.
That is especially difficult for annuity producers who have previously focused on helping people accumulate assets through annuities or other products. How do they flip over to the income discussion? What to point out? How to make the issues clear to the customer? Would certain customers do better with a systematic withdrawal plan than an income annuity?
An increasing number of annuity carriers do provide educational information and online tools to help sort all this out.
The problem is, not all producers have access to those materials. In addition, some producers hesitate to rely on provider-supplied materials out of concern that the materials may promote only the carrier’s products or solutions. Others do use provider materials, but they also want to use materials from independent resources — to ensure a balanced perspective.
Some help from the GAO
A new report from the Government Accountability Office (GAO) might be of some help to agents and advisors who are wrestling with those issues.
The report includes a discussion — and an interactive graphic — that highlights the options consumers have when setting up an income plan. It also summarizes some of the factors that people need to consider.
The discussion is part of GAO's recent analysis of how various countries are handling “spend-down” options in defined contribution retirement plans, such as 401(k)s. The options covered in the report are lump sum (the most common form of payout from defined contribution retirement plans in the U.S., according to GAO), programed withdrawals (essentially, systematic withdrawals that start at a set percentage which can be changed later), and annuities.
The report defines annuities as “guaranteed payments that are normally secured through a contract with an insurance company for either a set period or for the participant's lifetime.” (In industry lingo, advisors tend to refer to such products as income annuities or deferred annuities that have been annuitized.)
Although the report focuses on income options for people in retirement plans, the comments about annuities have applicability to retail income annuities as well.
For instance, the researchers point out that the amount of annuity payout a person receives can hinge on a number of factors, not just on the retirement nest egg a person has accumulated (minus fees) in a plan.
Other factors include the age when payouts begin, they write, noting that older people generally receive higher payments than younger people. In addition, gender is a factor because men in the U.S. typically receive higher payments than same-aged women because men tend to have shorter lifespans than women. Another factor is health, because certain health issues may qualify a person for higher payouts.
The impact of interest and other factors
But where the report really rings bells for advisors in the retail market is in the researchers’ discussion about the impact of interest rates, inflation and investment returns on the retirement income.
People face trade-offs when they choose an annuity, lump sum or programmed withdrawal spend-down option from a retirement plan, the researchers write. That’s because “no single option protects against all the various risks participants may encounter in retirement, such as longevity and inflation risk.”
So, as retirement approaches, people must weigh the strengths and shortcomings of each option against their own unique retirement needs, the GAO researchers contend. People “also need to consider their other sources of retirement income, including government benefits and personal savings.”