How annuities can be part of your client’s retirement formula

By Shawn Plummer

Reaching retirement age can be a worrying time for many people, with financial uncertainty and rising health care costs. According to CNBC, the average American receives a monthly sum of $1,666 in Social Security benefits. With Social Security providing such a low income, many retirees are searching for additional income sources.

Advisors specializing in retirement can assist with estate planning, long-term care plans and investment management. You must be familiar with the benefits of annuities to help your clients find the best financial options for their retirement.

Let’s explore the ways that advisors can help retirees formulate a plan for their future.

Why are annuities important?

A recent GOBankingRates survey revealed 66% of Americans fear they will run out of money during their retirement. An annuity is an agreement between a financial institution or insurance company and a purchaser. Annuity contributions are collected over time to generate a monthly sum that will provide a reliable income during their retirement.

Annuities play a vital role in protecting the future of Americans who reach retirement age with rising health care bills and long-term costs.

What are the benefits of annuities?

One of the major benefits is that there are various annuities to suit different financial needs. It is important to review the options with your client to ensure they receive the best annuity for their circumstances. Financial products are always evolving, so you should be up to speed on the latest annuity offerings available to your client.

Annuities provide financial security for retirees who may face unforeseen medical costs, ongoing care or living expenses that exceed their income. An annuity can also eliminate student loans and other debts that could affect loved ones after an investor dies.

Financial growth

The financial benefits that your client receives depend on the level of risk associated with their annuity. Fixed annuities offer low-risk rewards, whereas variable annuities provide various investment options that could lead to a bigger return on investment.

Fixed annuities

Fixed annuities are a low-risk option for guaranteed interest rates during the agreed period of the investment. Some of the main benefits for retirees include:

» Tax deferral.
» Death benefits.
» Guaranteed income.
» Growth potential.

The guaranteed income of a fixed annuity can provide peace of mind for many clients who need the security of a regular income. The money invested in a fixed annuity will grow tax-free until the payouts begin.

Various payout options

Retirees can choose to receive their annuity payout immediately or at a later date. Deferred annuities allow the client to pay their premiums and receive their payments months, years or decades later.

Immediate annuities

Immediate annuities are often funded by retirement accounts such as a 401(k) to cover the shortfall between ongoing health care costs and income. Retirees can withdraw money from their retirement funds to cover expenses as soon as 30 days after their initial investment.
The key benefit of an immediate annuity is that investors can receive payouts almost right away. This is a great option for clients who need a quick solution to cover their living expenses during retirement.

An immediate annuity is beneficial for people who are ready to retire with a steady income to support themselves. There are many options for clients seeking immediate annuities, including fixed immediate annuities and variable immediate annuities. Variable annuities rely on market risk and performance. For this reason, many clients may choose the low-risk, fixed immediate annuity.

Deferred annuity

Deferred annuities are a suitable choice for people who want to continue working and accumulate wealth for their retirement. The funds in the annuity are not taxed until they are withdrawn, which provides an opportunity for maximum growth.

If your client has time for their annuity to grow, then a deferred annuity boasts many benefits.

The most common payout methods for deferred annuities are lump sum, systematic withdrawal and distribution plans. Clients can contribute unlimited amounts to their deferred annuity and watch their investments grow before they retire.

Joint-life annuities

Joint annuities are an excellent option for retirees with loved ones in their care. A joint-life annuity is based on the life expectancy of two people — for example, spouses or partners. This type of arrangement is useful if a client’s spouse does not have a pension plan or investment to support themselves.

A single-life annuity is better if your client does not have any financial dependents. Some of the benefits of joint life annuities include:

» Financial support for loved ones.
» Tax liabilities spread over a longer period.
» Financial protection for clients with a short life expectancy.

For many clients, protecting a spouse or family member will often outweigh any disadvantages associated with a joint annuity. Death benefits are also available with most types of annuity and are often equivalent to the initial contribution.

Helping clients choose the right annuity

Your clients should start looking at annuities as soon as possible to take advantage of interest rates. Many companies will not sell annuities to people over the age of 80, so it is important to buy annuities as soon as possible. It is best to advise your clients to buy annuities between the ages of 70 and 75 to maximize their payout.

It is also important to remind clients that they cannot change their minds after they sign an annuity contract. Choosing the right annuity depends on the following factors:

» Age group.
» Premium sum.
» Income needs.
» Long-term health care requirements.

Annuities provide various options for clients who want to leave money behind for family members. Ask your client about beneficiaries to help them decide which annuity option is right for them.

Updating your knowledge on the latest annuity options for your clients could improve their quality of life. Some of the main advantages of annuities include:

» A guaranteed lifetime income.
» Saving is easier with deferred taxes.
» Complements pension plans and Social Security income.

Annuities are an excellent option to provide retirees with a reliable source of income. By broadening your knowledge, you can help retirees understand annuity contracts and find the best option for their circumstances.

Shawn Plummer is CEO of The Annuity Expert and a licensed financial professional focusing on annuities and insurance for more than a decade. Contact him at [email protected].