The fear of outliving one’s wealth exerts a powerful force against retirees’ confidence as they navigate life’s milestones. Considering the likelihood that today’s average 65-year old man may live to 84 and a 65-year-old woman to 86.6, many clients have good reason to look for ways to help make sure their money lasts as long as they do.1
Whether they’re risk-averse investors or they feel less than fully confident about their ability to manage their own money in retirement, some clients may achieve a greater sense of security by adding annuity products to their portfolios.
Annuities vary widely, and they aren’t investors’ only lower-risk option for creating long-term income streams. Others include savings accounts, bonds, CDs and money market funds. But along with these options’ lower risk may come lower returns. In fact, given the Fed’s long-term expectation of low rates enduring over the coming years, inflation may outpace interest rates in many long-term retirement savings options.2
Market volatility, low interest rates, unpredictable inflation, longevity concerns and other elements of uncertainty all contribute to clients’ deliberations over an annuity purchase. These considerations also come into play when clients are considering whether to add a second annuity to their retirement income strategy.
Understand Why Clients Selected an Annuity in the First Place
No single strategy or product holds the answer to retirement security for everyone, and like your clients, annuities have a wide range of objectives.
For example, just as some clients want to accumulate wealth, index-linked annuities are created to empower some risk-averse clients to participate in financial markets while controlling risk of market losses. Other investors have precise growth goals and want to leave a financial legacy; they may see an advantage in fixed annuity products with guaranteed, stable growth rates and death benefit options. Still other clients look for the reassurance of guaranteed lifetime income and choose an income annuity to supplement their Social Security payments.
A client may have selected a first annuity to address just one of these concerns. As they consider the advantages of various types of annuities, they may feel that a second product may complement their retirement portfolio, taking into consideration risk tolerance, goals and interests in retirement, standard of living, and a holistic look at other investments and assets in a portfolio.
There are several ways you and your clients may explore using two or more annuity products together to meet their long-term investment and income goals.
Accumulation, Income or Legacy? Clients Answer, ‘Yes’
Conversations around annuity choices often begin by asking clients whether they want to build their retirement savings over time or draw income from the start. That’s because, in general, deferred annuities are typically selected to help accumulate wealth and leave a legacy, while immediate annuities are more often chosen to meet a need for income.
But that question has its limits. After all, given the choice, many clients may actually want to achieve all three goals: secure a lifetime income, accumulate wealth over time — and leave a legacy for loved ones after death.
This desire makes a strong case for using more than one annuity type in a complementary approach.
The difference between immediate and deferred annuities, for example, may lead a client to purchase two products, one in each category. This is commonly called a split-annuity strategy. While the deferred option may allow them to grow their wealth over time and ensure added income to meet their needs in later years, an immediate annuity’s structured payments may help the client avoid overspending in earlier retirement as they transition into a new lifestyle.
In another case, clients who want the potential gains of market participation may first be attracted to index-linked annuity products … and over time, perhaps as they experience or become concerned about market volatility or other factors, they may seek a more conservative option like a fixed annuity to “add a layer” of risk control to their overall retirement portfolio.
Retirees who chose their first annuity with a sole focus on guaranteed lifetime income may experience changes in their circumstances that lead them to think more about what they leave behind for a spouse or other loved ones. These clients may find that a second annuity with an added death benefit offers the assurance they want.
Another circumstance may arise in which an investor already purchased a deferred income annuity and then comes into a sum of money — for example, as a life insurance beneficiary. In a case like this, a second annuity may be an attractive option for transforming that sum into a steady income stream.
Filling Portfolio Gaps to Achieve Client Satisfaction
There may be cases when a client already owns an annuity and is less than fully satisfied with their product selection. At first, they may want to replace their existing annuity with a different type. But substantial surrender penalties and other charges can be a major concern, and an empathetic advisor may instead recommend a second annuity with specific characteristics that could help offset the client’s concerns about the first.
A strong contender for second annuity selection may be one with a longer deferment term, since it can help clients achieve an assurance of an income stream much further down their retirement path, when they may no longer be capable of bringing in income through work.
On the other hand, if an investor already purchased a deferred income annuity and more recently came into a sum of money — for example, as a life insurance beneficiary — a second annuity may be an attractive option for transforming that sum into a steady income stream.
Building a Complementary Annuity Strategy
The most important factor in creating a retirement strategy that incorporates complementary annuities is a thorough understanding of different types of annuities, and how investors may select and add benefits to more fully meet their needs and goals.
A helpful place to begin is a conversation that dispels myths surrounding annuities, and an exploration of the many annuity types available as clients weigh their options. Educate clients about today’s annuities and debunk popular stereotypes with our infographic, Debunking Annuity Myths. Click the button below to access and download your copy.
1Social Security Administration, Retirement & Survivors Benefits: Life Expectancy Calculator, Accessed December 8, 2020.
2CNBC.com, Fed sees interest rates staying near zero through 2022, GDP bouncing to 5% next year, June 10, 2020.