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After a long run of annuities being an afterthought for many advisors, the products are back in style and the trend might have some momentum.
As advisors know, annuities are products that offer guaranteed lifetime income for clients. Alone that’s appealing, but amid rising interest rates, annuities’ payouts are as high today as they’ve been in years, representing another potential perk for clients.
In addition to lifetime income, annuities can offer guaranteed interest rates as well tax-deferred growth – the former being pertinent at a time when more Federal Reserve rate hikes appear unlikely. As for tax- deferred growth, that has benefits to a broad swath of clients.
“Careful management of taxes paid on your savings can substantially increase those savings’ growth. Greater savings mean greater retirement income. This is one of the great benefits of individual retirement accounts, 401(k)s, and other retirement vehicles. These vehicles allow you to defer taxes until you need your retirement income. When you are deferring taxes, you are earning interest on money that would have been paid to taxes. This is the power of tax deferral,” notes Alex Strangle of the WealthVest annuity center.
Annuities Regain Appeal
Like any other asset class, annuities aren’t for all clients, but these products do offer wide appeal. For example, clients mulling a single premium immediate annuity (SPIA) may want to consider such a move now, indicating there’s potentially fruitful opportunity for advisors on this front.
“These contracts can offer payouts for life, covering the purchaser (annuitant) and, for an additional cost, a spouse. They could make sense for people who are in good health, concerned about outliving their savings, or value having a predictable income stream (in combination with Social Security payments and their investments),” according to Charles Schwab research. “Of course, there may be limits to how much of your savings you should consider committing to an annuity, as you'll want to retain the flexibility and liquidity that your regular investment portfolio provides to deal with both expected and unexpected expenses, as well for any legacy goals.”
On the other hand, the current environment could be opportune for advisors to chat with clients that already hold a deferred annuity.
“These investors could consider annuitizing their existing contract now or potentially even exchange their contract for a new SPIA, assuming they prefer the features and meet certain criteria,” adds Schwab.
Conversation Starters for Advisors
Obviously, many advisors are already annuities proficient. That just comes with the territory. However, save for seeing some television commercials or hearing about annuities from colleagues, family and friends, most clients are not annuities knowledgeable.
Advisors can guide those clients with some basic steps, using a holistic approach in an effort to right size annuities allocations.
“If you are nearing or in retirement, consider categorizing your expenses as either essential or discretionary. In our view, it makes sense to think about covering some, if not all, of your essential expenses with predictable guaranteed income sources like Social Security, pensions, and possibly annuities,” concludes Schwab. “So, how much should you commit to an annuity? Based on our research, you could consider starting with between 10% and 25% of your savings for an income annuity, but not more than 50%. Consider keeping the rest invested to suit your spending needs and offer growth potential.”