With options for a steady stream of guaranteed income, an annuity might be just the right financial vehicle to help a client stay on track with their retirement goals.
Or, it might not.
While annuities are a good choice for many people saving for retirement, they aren’t ideal for everyone. There are no hard-and-fast rules for recommending annuities as part of a larger financial strategy, but the following five criteria may be an indication that annuities are a good fit.
1. Your client is in relatively good health
In 2024, someone who turns 65 can expect to live another 20 years or more.1 One of the potential benefits of annuities is to guard against longevity risks, no matter how long a person may live.
Clients who are active and in good health may be better candidates for an annuity as part of their portfolios. An annuity may help a client maintain their standard of living throughout retirement by providing options for a guaranteed income for life, helping ensure they won’t outlive their savings. On the contrary, clients with poor health may be better served by other options.
2. Your client has enough money for immediate and short-term needs
Clients should factor in their financial needs over the next several years before purchasing an annuity. For starters, ask clients whether they have an emergency savings fund to help cover unexpected expenses. Likewise, are there other short-term expenses on the horizon that will need to be met, such as a new vehicle purchase, home renovations, or paying for a wedding or college tuition?
Purchasing an annuity should not be burdensome or leave a client strapped for cash when there are other important short-term financial goals or unexpected expenses. This is especially important considering annuities often come with early withdrawal penalties. It’s best to ensure a client won’t need to dip into their annuity’s value prematurely.
Helping clients find a balance between short-term and long-term goals is one way financial professionals can demonstrate value and fulfill their fiduciary responsibilities.
3. Your client has other adequate streams of income
Clients who are lucky enough to have pensions may not need the guaranteed income that comes with many annuities. When combined with Social Security, some pensions may cover their living expenses throughout retirement.
And, depending on how well they’ve planned and saved through the years via an employer-sponsored plan or other investment vehicles, a client may be able to make strategic withdrawals that will carry them through their golden years, and maybe even leave a nice inheritance for loved ones.
Evaluate a client’s entire portfolio and include conservative projections for the next 10, 20 or 30 years to help them visualize their financial future and whether there’s a risk of running out of money.
4. Your client desires tax-deferred growth
Some clients may appreciate the potential benefit of tax-deferred growth offered by annuities, especially those who are high earners and fall into a higher tax bracket.
Because annuities grow tax-deferred, the dividends and interest remain untaxed until they are withdrawn during their retirement years. (When withdrawn, they are taxed at an ordinary income tax rate, and not at a Capital gains rate.) At that time, your client may drop to a lower tax bracket. If that happens, they’ll likely be taxed at a lower rate than what their income is taxed at today.
5. Your client has a low risk tolerance
In general, as individuals approach retirement, their tolerance for risk wanes because they have fewer years to make up for lost ground if their investments lose money. The guaranteed income from annuities is a welcome aspect for many investors with low risk tolerances, and the returns may be more appealing than money market funds, CDs or savings accounts.
Over time, some annuities may have comparable performance to traditional market investments, while others may not keep up with inflation, stressing the importance of exploring various options, features, fees and the performance of each over time.
Of course, a combination of factors may need to align to determine whether an annuity is right for a client. And, given the variety of new annuity products available and the different ways they can be structured, there may be an appropriate product available today that wasn’t available a few years ago.
As an example, TruStage has a wide range of fixed annuities, variable annuities, registered index-linked annuities and income annuities that are designed for different client scenarios, and some can be customized to align with varying risk tolerances.
Contact the TruStage Annuities sales desk at 1.877.345.GROW (4769), option 1, or find your designated team to talk through scenarios where each annuity may be appropriate based on your clients’ needs.
