Annuities ‘can add a little juice to the retirement portfolio’

Retirement is not a one-time event; it is a dynamic phase of life that requires a vision of what the post-employment years will look like for each individual and how that vision will be funded.

Tamiko Toland, founder of IncomePath, discussed the process of individualized retirement planning and how annuities can help fund each individual’s retirement vision during a recent webinar by the National Association for Fixed Annuities.

Retirement planning “is really not about the money,” Toland said.

“We think about retirement income planning from the income perspective. But you need to understand what that retirement will look like. Then obviously you need money to support whatever you imagine retirement will be.”

Toland said retirement consists of three elements: Social, work and leisure. “We need to help people to understand their preferences when it comes to that lifestyle they envision,” she said.

Retirement planning also involves three goals, she said.

1. Lifestyle goals: Nobody’s retirement looks the way it’s depicted in product brochures.
2. Lifecycle goals: Priorities change as retirement unfolds.
3. Money preferences: Some retirees are afraid to spend the money they saved while others can’t spend it fast enough. Annuities can address the needs of both types of retirees, Toland said. “You can’t have enough until you know what enough is for,” she said.

A three-step process

Toland described a three-step goal-based process that is a step toward the planning itself. It’s a way of talking about planning that integrates the idea of annuities but is more about what the client’s retirement objectives are. The first part of the process consists of discussing:

1. Retirement income versus legacy. There are only two ways you can use your retirement savings – retirement spending or gifts after death. Separate your savings based on your goals.
2. Spending expectations and flexibility. What are your spending expectations and how flexible can you be from one year to the next? Greater flexibility means being able to spend more because you can adjust.
3. Investment risk. Investment risk is important for growth but you don’t know whether you’ll be lucky or unlucky. What is the right amount of risk?

The second part is a discussion around spending flexibility. Those planning for retirement must consider their ability to spend in the following areas: essentials, daily enjoyment, splurges and sharing.

Finally, clients must examine the risks in retirement, which includes lifespan, investment, death, inflation and health.

Annuities address the risks

Fixed annuity income addresses the risks around investment and lifespan, Toland said. Because an FIA is similar to a bond in a retirement portfolio, an individual can take on more investment risk with their other assets. In addition, an FIA provides peace of mind and freedom to spend because the insurer manages the uncertainty.

Guaranteed income also helps clients with late-life planning, she said. This is especially important as the majority of older Americans will experience some kind of cognitive decline as they age, and that decline impacts their financial judgment.

“Providing those income protections now while you know what you want for retirement can pay off tremendously, and guaranteed income can be part of that strategy. Having that income coming in takes away from the decisions of how we spend, how do we withdraw funds.”

Annuities can “add a little juice to the retirement portfolio in terms of risk,” Toland said, and that has many benefits for retirees, especially in terms of their ability to maintain their social interactions in retirement.

“Annuities have a role in helping us with our social interaction in retirement and helping us have a great last chapter in life,” she said.

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Susan Rupe is editor in chief, magazine, for InsuranceNewsNet. She formerly served as communications director for an insurance agents' association and was an award-winning newspaper reporter and editor. Contact her at [email protected].