These headlines, taken from different articles about annuities in the personal finance media, illustrate a bias against these retirement savings and income products. Few financial writers have embraced annuities as a financial planning tool; some have been downright hostile to the concept.
But anyone who sells annuities knows two things to be true: annuities can deliver significant value to clients and they are also one of the most misunderstood financial products on the market. Perhaps that's why it was such big news when the Government Accountability Office (GAO) weighed in on the topic and extolled the value of annuities to retirees.
The GAO, in its June 2011 report to the U.S. Senate's Special Committee on Aging, helped lift what some viewed as a dark cloud around annuities by making several specific recommendations to help protect or improve retirees' lifestyles:
- Middle-income retirees should consider converting at least part of their savings into an inflation-adjusted annuity or choose a guaranteed stream of income from an annuity instead of a lump-sum from their employer-sponsored defined benefit plan.
- As life expectancies increase, Americans should consider putting off retirement until a later age, continuing to work and save, if possible.
- Americans should consider taking Social Security payments at a later age, say age 65 or 66, when they are eligible for full payments. Nearly three in four Americans begin taking income from Social Security when they turn 62 instead of waiting until age 65 or older to begin taking full benefits.
- The federal government needs to step up efforts to promote financial literacy.
The GAO report encouraged the use of annuities within defined contribution plans such as 401(k)s. But, as those who sell annuities know, most annuity sales are made individually to clients for a wide variety of asset accumulation, income and protection needs. The report's recommendations highlight many of the key benefits of annuities and provide an outstanding platform to help advisors educate their clients about how annuities can help them accomplish their retirement goals.
Your clients who are close to retirement are no doubt thinking about some basic questions:
- Can I afford to retire when I want?
- How can I ensure that I will have an income for as long as I live?
- How can I create a predictable income to cover my basic living expenses?
These are all smart questions, especially with the recent market volatility so fresh in many people's minds. Accumulating dollars is important, but of equal importance is making those dollars last throughout your clients' retirements. Most deferred annuities, fixed or variable, offer basic features such as tax-deferred growth, protection benefits and a choice of payout options. Variable annuities also offer a range of professionally managed investment options from which to choose. But, it is the payout potential of annuities, that is getting the most attention.
There are many different ways to generate income from annuities. They can provide a stream of income that lasts for a specific number of years or for life. They can guarantee a minimum level of income payments or asset level, regardless of market performance, allow income to be taken at a client's discretion, or a combination of different tactics. Some annuities even allow consumers to defer the start of income payments by years or even decades, reducing the ultimate cost of generating income.
Some of the most popular payout options available on today's market enables clients to exercise "living benefits," which guarantee a minimum income or asset level to draw income from, no matter what happens in the equity markets. There are many choices of "living benefits," depending upon the client's goals. The guarantees are based on the claims-paying ability of the issuing company. Which guarantee a client ultimately selects can make all the difference when it comes to a secure retirement.
Some insurers have been limiting the types of guarantees they offer, while others have been expanding their availability. Some of the newer variable annuities on the market enable advisors and their clients to choose from a range of different guarantees within the same product. But whether your client is considering a product that offers a single guarantee or multiple guarantees, each one provides specific advantages to meet different retirement goals:
Principal Protection: Guaranteed Minimum Accumulation Benefits (GMABs) can be advantageous to clients who want to secure their investment principal with the potential to grow their income base. These types of guarantees often make sense for investors who have a longer-term horizon and the goal of generating income down the road, typically 10 years or more from when they make their original investment.