The fear of outliving one’s wealth can exert a powerful effect on retirees’ confidence, and that can negatively impact their experiences with life’s later milestones. Considering that today’s average 65-year-old man is expected to live to age 84.2 and the average 65-year-old woman to 86.8, clients have good reason to look for ways to help make sure their money can last as long as they do.1
Whether they’re risk-averse investors or they feel less than fully confident about their own ability to manage their income, wealth and investments in retirement, some clients may experience a greater sense of security by adding an annuity product to their portfolios.
And in certain circumstances, you may encounter a client who finds that a second annuity bolsters that sense of security to the level they prefer for their retirement.
Annuities vary widely, and they certainly 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. Factor in year-over-year inflation sitting at 6.5% at the end of 2022 after peaking at 9.1% earlier in the year, it’s easy to see how lower-risk investments may struggle to keep up with changing costs of living.2,3
Market volatility, low interest rates, unpredictable inflation and rising costs, longevity concerns and other uncertainties all contribute to clients’ deliberations over whether to purchase an annuity, and what type of annuity suits their preferences. All these same considerations also come into play when clients think about adding a second annuity to their retirement income strategy.
Understand why clients selected an annuity in the first place
No single strategy or product is a retirement security “magic bullet” that can work for every individual. Just as clients have widely varying expectations and goals for retirement, annuities are designed to help meet a wide range of objectives.
For example, some clients want to accumulate wealth throughout retirement; index-linked annuities are created to empower some risk-averse clients to participate in financial markets while controlling risk of market losses.
Other investors may have very precise growth goals and a desire 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 benefits with a predictable, regular income stream.
You may encounter clients who purchased a first annuity to address just one of these concerns, and now find themselves rethinking priorities. Or their circumstances may have changed unexpectedly — calling for a retirement income strategy refresh.
After a detailed, holistic look at a client’s broader retirement financial picture, including risk tolerance, goals, interests and standard of living, they may decide that a second product may complement their retirement portfolio.
Here are a few examples of ways you and your clients might explore using two or more annuity products together to meet their long-term investment and income goals.
Accumulation, income or legacy? When clients want all three
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 can actually be limiting. After all, given the choice, many individuals would prefer 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 to help ensure added income to meet their needs in later years, an immediate annuity’s structured payments may help the client protect against overspending from their nest egg in early retirement as they transition into a new lifestyle.
In another case, clients who want the potential gains of market participation may initially select an index-linked annuity product … 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 gaps and covering bases to serve clients
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.
An empathetic financial professional may instead recommend a second annuity with specific characteristics that could help offset the client’s concerns about their initial selection.
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.
Helping today’s retirees meet tomorrow’s needs
Where previous generations of workers could rely on employer-paid pensions, only 15% of U.S. private sector workers had access to a pension in 2022.4 As baby boomers continue to reach retirement age amid high rates of inflation, volatile markets and changing outlooks on what matters in life, a strategy using complementary annuities may help meet their objectives.
Clients who have already retired may need that second look at their strategy and overall retirement portfolio, especially in the wake of volatility and high inflation. A helpful place to begin with clients who are still working is a conversation about the retirement plan access they have and whether they’ve planned sufficiently to cover their expenses over what could be a very long retirement period.
Help clients understand the potential impact of protected lifetime income that they can’t outlive. You can get a clearer understanding of the challenges that may await many baby boomers in retirement with our online guide, Are Your Clients Facing a Retirement Income Crisis? Click the button below to access and download your copy.
