With life expectancies greater than ever, retirement could very likely be the longest phase of our client’s lives. Therefore, it is absolutely imperative for retirees to have a plan in place that;
• Provides the ability to spend and enjoy their money in retirement and
• Protects them from “living too long” and outliving their income.
Since retirement income planning is an extremely important and complicated process, this is something retirees should not attempt to do on their own. In addition to the risk of large investment losses and outliving their assets, there are other major challenges and considerations such as taxes, inflation, stock market and interest rate volatility, rising healthcare costs, taxes, and much more.
Why Consider an Annuity?
1. Growth Potential – Clearly every retiree wants their money to grow over time. The reason growth is so important is not only to accumulate more wealth, but also to fight against the aforementioned many “money predators’.’
Most retirees will tell you they prefer not to spend their principal, and would rather live off the income generated from their principal.
Therefore, in order for their income to keep pace with things like inflation, most annuities offer a well-diversified array of investment options to choose from which offer the potential to keep pace with one’s changing lifestyle and income needs over the long term.
2. Safety Provisions – By far, the two biggest financial fears for most retirees are: losing money and running out of money.
The fear of losing money and/or running out of money is not only understandable but also extremely critical. In fact, I firmly believe that “90% of a financial professional’s job is avoiding large losses”.
If your clients are taking income from their retirement assets and suffer significant losses (particularly in the early years of their retirement and income distribution) this can be extremely devastating and sometimes irreparable. In other words, the combination of large losses and withdrawing income can dramatically increase the probability of running out of money.
Therefore, annuities provide an alternative and solution, since most contain contractual guarantees that can insulate your clients against outliving their income, even if they suffer large investment losses.
3. Tax Efficiencies – I always jokingly say that my least favorite uncle is “Uncle Sam”. I have yet to meet someone who truly enjoys paying taxes. And of course, taxes come in all flavors; ordinary income tax, capital gains tax, taxes on dividends and interest, state taxes, estate taxes, and more.
John D. Rockefeller once said; ”The fastest way to accumulate wealth is to make sure you never pay tax on income you don’t use.” That may be one of the most brilliant statements I’ve heard aside from Einstein’s theory on compound numbers.
Annuities can offer two unique advantages with regards to taxes. First, while non qualified monies are accumulating inside an annuity, they are growing tax-deferred. Put another way, a client’s monies are not subject to tax consequences such as capital gains, dividends, and interest. Second, many annuities offer clients with non qualified monies the ability to provide tax-advantaged income when they are in the distribution stage.
Since we can’t beat the unbeatable opponent (the IRS), annuities provide our clients with options to minimize or avoid many forms of unnecessary taxation for non-qualified monies – where applicable and appropriate.
4. Income You Cannot Outlive – Given the exponential growth of the baby boomer generation, and the advancements made in modern medicine, life expectancies today are greater than ever. For example, when Social Security was first enacted in 1933, the average life expectancy for a male was approximately 59 years old…and yet Social Security didn’t start paying benefits until age 62!
Since males today have an average life expectancy of approximately 85 years old, it is easy to see why we are having such a tremendous battle with Social Security benefits. Many studies show that by the year 2030, more than 2/3 of the U.S. population will be above the age of 60.
So the message here is clear. Given the fact that today’s retirement plans are demanding a much longer period of income distribution, annuities are becoming increasingly popular alternatives.
5. Income Growth Potential – If a retiree needs their income to grow, their assets obviously need to grow at a rate that exceeds their withdrawal rate. Since many retirees have little to zero risk tolerance, annuities can provide a greater “peace of mind” to invest a portion of their monies in the stock market.
Back when interest rates were much higher, many retirees thought they could accomplish an adequate amount of retirement income by simply investing in bonds and CDs. However, most retirees found that these vehicles alone were simply not enough. After factoring in things like investment fees, inflation, and taxes, utilizing income-producing investments is usually solely capable of accomplishing income growth potential. Of course, this is especially true considering today’s historically low interest rates.
Given the many features, benefits, riders, and guarantees of an annuity, they can sometimes increase the willingness for a retiree to invest their retirement monies more aggressively than other investment options. Of course, this varies on a case-by-case basis. (continued on page 2)
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