Looking for retirement flexibility? Annuities are the answer

A client came to me with $500,000 and a deceptively simple question: “How can I ensure I have $1,600 each month in retirement without running out of money?” Like many who are approaching retirement, he worried that market volatility, taxes and inflation would drain his savings too quickly. He needed a way to maintain his lifestyle without the fear of running out of funds.

My answer? Annuities. 

For advisors, understanding annuities is not simply about selling the product but about feeling confident in applying one of the many tools available to achieve client goals. Annuities are a savings vehicle that provides guaranteed income and growth opportunities. 

Annuities at a glance

At their core, annuities are contracts with insurance companies that convert savings into a steady stream of income. They can help clients manage longevity risk, protect principal and add predictability to a retirement plan.

Although annuities come in many forms, their basic idea is simple: provide guaranteed income and flexibility in how that income is structured. Think of them as different models of cars. Each has unique features, but all share the same basic purpose: getting clients safely from point A to point B.

Types of annuities 

Annuities come in several forms. Each type and subtype offers distinct features and trade-offs. Understanding the many forms and their purpose helps advisors match clients with the right product for their needs. The following are some of the more common annuities used today:

» Fixed indexed annuities: FIAs protect the client’s principal from market loss while allowing for growth tied to an index. A key advantage is the ability to add an income rider, such as a guaranteed lifetime withdrawal benefit or a lifetime income benefit rider. These riders transform the annuity into a personal pension, ensuring a guaranteed income stream for life. 

Riders must be chosen at purchase, which means advisors should do their best to understand the client’s needs through the planning phase to ensure a rider is the best one for their goals. 

» Variable annuities: VAs provide greater access to market growth but also expose the client’s principal to loss based on market fluctuations. These annuities are best suited for clients who already have other guaranteed income streams and can tolerate more risk. 

VAs can also include income or death benefit riders, although these come with higher costs. On average, VAs carry fees of about 3%, compared with roughly 1% for FIAs. 

» Multiyear guaranteed annuities: A MYGA functions much like a bank certificate of deposit, but with tax-deferred growth. Clients deposit a lump sum and receive a guaranteed interest rate for a set period, such as three, five or seven years. 

Because there are no annual 1099s on interest, MYGAs often appeal to clients seeking predictable returns without risk of losing funds to market variability. Think of this annuity as the “set it and forget it” option, because much like a CD this allows clients to grow their savings without much management.  

» Single premium immediate annuities: SPIAs are designed for clients who need income right away, hence the “immediate” title in the annuity. Funded with a one-time premium, clients begin receiving payments immediately and can structure the plan for a set number of years, or for life. 

Although SPIAs typically pay lower compensation to advisors, they remain a valuable tool for fiduciary planning when the client’s top priority is reliable income starting now. 

» Qualified longevity annuity contracts: QLACs allow clients to delay required minimum distributions until age 85 by shifting a portion of their individual retirement account assets into the contract. For tax-sensitive or high-net-worth clients, this deferral can prevent them from being pushed into higher tax brackets.

Consider a client who is inheriting a spousal IRA in retirement. They could move the IRA funds into their own name and purchase a QLAC to delay withdrawals. This annuity would help them remain in a lower tax bracket during retirement and continue receiving funds while growing them over time. QLACs are not suitable for everyone, but they offer a unique way to extend tax advantages and address longevity risk.

Which annuity is right? 

With so many types available, the best annuity always depends on the client’s purpose; not all types are best suited to all clients. Advisors should focus first on what the client needs their money to accomplish, then match the annuity structure that best meets those needs. 

Here are some questions to ask yourself when determining which annuity is the best.

» Do they need income now or later? Immediate income needs often mean a SPIA. If they instead are looking to grow their funds over time, an FIA with an income rider can provide guaranteed income later.

» Are they prioritizing securing or growing their funds? Risk-averse clients often prefer MYGAs or FIAs, which guarantee principal and minimize volatility. Growth-oriented clients with higher risk tolerance may consider a VA.

» What type of retirement savings do they have, and what is their taxable principal? An annuity funded by a Roth IRA can provide tax-free income and inheritance advantages. A traditional IRA or 401(k) rollover will mean fully taxable withdrawals. A nonqualified cash annuity keeps the principal tax-free but taxes the growth, and withdrawals are taxed on a last-in-first-out basis.

» Focused on leaving a legacy? Death benefit riders or Roth-funded annuities can support estate goals while minimizing the tax burden for heirs.

Keep in mind that the type of annuity matters less than the purpose behind it. Advisors who have a deep understanding of their clients’ needs and the types of annuities available are far more likely to arrive at the ideal solution.

The bucket method — flexibility in action 

Once advisors understand the types of annuities and how to select which best fits their client, the next step is integrating them into the overall retirement strategy. One of the most effective frameworks for this is the bucket method.

The idea is to divide assets into different buckets based on their purpose and withdrawal timing. One bucket covers essential, guaranteed income. Another bucket allows for growth and inflation protection. A third might focus on estate planning to provide heirs with a tax-advantaged inheritance.

Take the case of the client mentioned earlier; he came to me with $500,000 in savings and needed $1,600 per month to cover living expenses. The solution was to carve out enough of his retirement savings to purchase a SPIA, which immediately provided $1,600 per month for life. That established the client’s income needs to ensure his daily expenses would be met in retirement. 

With the remaining funds, we moved capital into an FIA with an income rider. This allowed the account to grow over time, providing the client with a second income stream he could activate to alleviate inflation and additional costs. The combination of immediate and deferred income gave both stability and flexibility.

Annuities used with purpose give advisors a way to replace fear with confidence. The client with $500,000 in savings is one example: By carving out part of his savings for guaranteed monthly income and letting the rest grow for future needs, we built a plan that met today’s expenses while preparing for tomorrow’s inflation. 

That’s the power of annuities — not a one-size-fits-all product, but a flexible strategy to turn uncertainty into peace of mind.

Brad Pistole is president of the Ozarks Retirement Group and the long-standing host of Safe Money Radio. He is a 15-year member of Million Dollar Round Table with 11 Top of the Table qualifications. Contact him at [email protected].