Planning for lifetime income with annuities

11/29/2023 — Key takeaways:

• Age and risk tolerance are two major factors clients can consider when choosing an annuity.
• There are different types of annuities to choose from, designed to help clients grow their retirement income and protect them from outliving it.

As your clients approach retirement age, they may be wondering, "how much money will I need to retire?" or "how can I make sure my money lasts as long as I do?" Armed with the knowledge and tools to help clients plan for lifetime income with annuities, you can help ensure their retirement years are as worry-free and comfortable as possible.

What is annuity income?

Annuities are designed to help you grow your retirement income and protect you from outliving it. In return for your premium with an insurance company, you receive income in the form of regular payments through annuitization or a guaranteed lifetime income benefit that is available for an additional cost. It’s important to note that guarantees are subject to the claims paying ability of the issuing insurance company. Additionally, clients may be charged a penalty if they take their money out early, if they’re not yet 59½ (additional 10% tax penalty), or both. Variable annuities have fees and charges that include mortality and expense, administrative fees, contract fees and the expense of the underlying investment options. There are many reasons why your client may want to purchase an annuity. Speaking to the myths about annuities can help them feel more comfortable and confident deciding which annuity is right for them.

Assess your client’s needs

Age and risk tolerance are two big factors in annuity preference—typically as you age, risk capacity decreases, prompting a shift towards more stable annuity options. With today’s increasing life expectancy, it can be even more important for clients to plan for lifetime income to ensure financial security through their retirement years. The ages of your clients can help guide the types of recommendations you make. For example, age can be a factor when deciding if one is more concerned with growth, or risk.

Risk tolerance

Risk tolerance will play a significant role in choosing annuity products. For instance, fixed annuities typically offer higher income because the insurance company takes less risk, but their investment returns offer less upside compared to variable annuities. Some clients may prefer higher guaranteed income despite potential lower investment returns, while others may be more comfortable investing in mutual funds, expecting higher returns. It all depends on how much risk they’re willing to assume.

Different types of annuities

Immediate annuity

If a client needs immediate income, an immediate annuity may be a good solution for them. This type of annuity requires clients to make a lump-sum payment to the insurance company in exchange for regular payments that begin immediately. This type of predictable income can be purchased for life or for a set period of time, and your clients can defer payments for up to a year in some cases. Immediate annuities are ideal for clients who have already retired or will retire soon, and who want a more conservative option.

Potential benefits of immediate annuities:

• Guaranteed income as long as you need it
• Liquidity feature (access to your money when you need it most)
• Hedge against inflation
• Medicaid friendly

Variable annuity

Variable annuities allow clients and advisors to determine how assets are invested by choosing from a selection of investments called subaccounts. These investments can include stocks, bonds, money markets, etc. As the value of these investments fluctuate based on the ups and down of the market, so will the contract value. In contrast to a fixed annuity, which provides a guaranteed interest rate, variable annuities have greater growth potential but can also lose money.

Fixed annuity

Fixed annuities are ideal for clients who want to avoid market risk and need a predictable source of income. They offer minimal investment-risk exposure with the opportunity to grow money at a set interest rate. The rates are generally higher than with traditional savings vehicles. On the other hand, variable annuities offer the potential for higher returns, but come with higher fees and market risk. Clients who have a higher risk tolerance and want the potential for higher returns, however, may opt for a variable annuity.

Fixed indexed annuity

Fixed indexed annuities, a type of fixed annuity, are a good option for clients who want the potential for higher returns without risking their principal. Fixed indexed annuities provide a source of guaranteed income that balances growth potential and protection. This type of annuity is similar to fixed annuities, but its returns are tied to a stock market index such as the S&P 500. If the index performs well, clients receive higher returns, but if the index performs poorly, their returns are protected.

Registered index-linked annuities

This type of annuity might be a solution for clients who want an opportunity for growth, but with some level of protection from market downturns. A registered index-linked annuity, or RILA, grows tax free, so clients won’t pay taxes on any growth until they make a withdrawal.

Returns are based in part on the performance of an underlying index or indexes, but a RILA is not a stock market investment and does not directly participate in any stock or equity investments. In addition, RILAs also provide an option to convert the annuity into a stream of income payments in retirement through annuitization.¹

Investment-only variable annuity

An investment-only variable annuity, or IOVA, is focused on investments and can be more affordable than other annuity options. Unlike traditional annuities that offer pre-set payment amounts, IOVAs allows clients to invest in a range of funds. Since IOVAs are tax-deferred, they allow the invested money to grow unhindered by annual tax deductions. This tax efficiency, coupled with the ability to tap into the broader market’s growth potential, makes IOVAs a compelling choice for clients who are open to higher risk for the potential higher returns.

How annuities can be used to provide lifetime income

Choosing the right annuity can be overwhelming for clients—there are many options! By understanding the different types of annuities and their features, you can help clients plan for lifetime income that meets their unique needs and goals. Whether clients are concerned about market risk or need immediate income, there is an annuity out there that can provide stable, predictable income for as long as they need it.