Annuities Offer Options For Retirement Planning
February 6, 2010 by Laura Hahn
Nearly two years have passed since the markets dropped, leaving many who invested for retirement with an uncertain future. The nightmare of outliving their retirement savings became a shocking reality. What could they have done to avoid this nightmare?
Everyone faces certain challenges when investing; however, not all investments present the same risks. Said another way, not all investments are suitable for the retiree or near retiree.
We can all agree that at retirement, there needs to be some assets to generate income. The assets can range from cash to other investments that carry varying degrees of risk and potential commensurate reward. While cash presents no potential for growth, it also precludes any market-based chance for loss. The question that must be answered is, “How much risk can your clients afford to accept?” The answer depends upon their needs and resources.
Clearly someone with significantly more retirement assets than needed to provide a desired retirement income can afford to accept more risk than someone with barely enough retirement assets to generate retirement income. So the issue becomes how best to assure a required/desired retirement income.
At one extreme, retirement funds could be held in cash or certificates of deposit, and each month or year liquidating a certificate of deposit or withdrawing cash from an account would provide living expenses. As an example, let’s assume your client wants $30,000 per year for life and, to be safe, assumes he will not live beyond age 100. If he is 65 years old, he will need $1.05 million. I realize that I am crediting no interest, but I am also assuming no inflation—let’s keep this simple for the sake of the example.
If this client has $1.05 million going in and he does not live beyond 100, the plan works. But let’s take a closer look at the realities. Is a person who has accumulated $1 million dollars comfortable living on less than $600 a week? Maybe. More unsettling, at 95 years of age, will this client be comfortable knowing that there is only five years of income left? The $1 million nest egg has been reduced to $150,000—with no prospect of adding to the fund without taking unwanted risk. People are living longer—living to age 100 is becoming commonplace.
Perhaps a more reasonable approach would be to look at an immediate annuity or a single premium immediate annuity (SPIA). This same 65-year-old client could put $1 million into an SPIA and get more than $75,000 per year, guaranteed for life.
If the client is satisfied with $30,000 per year, there is an opportunity to provide valuable advice with regard to the funds ($500,000 plus) that are not needed to provide income. While investing guards against inflation or other unforeseen financial challenges, the client may prefer to use the extra funds to form the basis of an educational trust for grandchildren or fulfill a dream that the retiree only hoped to achieve.
Let’s take a slightly different and perhaps more realistic look at a potential planning situation. Assume a 65-year-old retiree has $1 million available for retirement. The retiree must have $36,000 per year to meet living expenses, but would like $50,000 to maintain his current lifestyle. Plus he would also like to plan for 3 percent inflation.
In this instance the planner’s role becomes critical. Clearly $500,000 could be invested in an annuity to get the required $36,000 for expenses and bring that level of assurance and comfort to the retiree. Yet you have the opportunity to find suitable investments to bring the additional $14,000 per year (or better), plus cover the 3 percent inflation. With the “mandatory money” guaranteed, your client may be comfortable with a moderate amount of risk to cover the $14,000 and the 3 percent inflation.
The point is not that an annuity is the only or best retirement funding vehicle, rather that the annuity is a retirement funding vehicle that deserves careful consideration. As there are unique and powerful benefits to annuities, so there are also drawbacks that must be considered.
Each retirement planning situation is different, as each retiree’s specific goals and attitudes are different. Additionally, annuities differ in benefits, features, design, interest rates and the strength of the issuing company. Your role as a planner or advisor is critical in the selection of the appropriate annuity.
Author’s Bio
Laura Hahn
Hahn is managing director of the annuity center for The Marketing Alliance, a national network of independent brokerage general agents. Hahn is responsible for all aspects of the company’s annuity business, including sales and service. Hahn can be reached at The Marketing Alliance, 111 Westport Plaza, St. Louis, MO 63146. Telephone: 314-275-8713.
