Why Annuities Are Sold, Why Annuities Are Important
It’s time to reacquaint ourselves with the benefit of annuities.
Contrary to recent articles from media outlets, annuities can be a valuable tool in a portfolio. Too often, the product gets bad press and people jump on the bandwagon. For the last two decades, our industry has been focused on recurring revenue and assets under management. That served our businesses and our clients well during the accumulation phase. But the game has changed.
Tax-deferred growth is a large benefit for any non-qualified assets – especially if they are generating long-term retirement income. Assets will grow and accumulate faster using a tax-deferred vehicle. One could argue that the lump-sum tax at the end of the accumulation period would be hefty. That’s true, but it’s not the best use of an income-generating vehicle like an annuity. Annuities allow for control of the tax disbursement, which avoids a lump sum distribution at a capital gains tax rate.
Fees are always synonymous with annuities, regardless of whether they’re fixed or registered. Clearly, some annuities are fee-heavy, and I don’t disagree. But most aren’t - in fact, fixed indexed annuities offer the same or similar income riders as their variable counterparts. Rider charges are much less expensive due to the stability of the general account, versus the fluctuation of underlying sub accounts.
Using the Principal
Traditional SPIA and DIAs are making a comeback due to the retirement crisis. People need to generate higher levels of income, for longer periods of time, with less assets than previous generations. Using principal and interest to do that over a person’s lifetime – for both qualified and non-qualified assets – makes sense. Once guaranteed income is in place, the remaining portfolio can be invested more aggressively. Equities have historically outpaced inflation, so future losses in buying power can be offset.
We often get caught up on asset allocation models. Instead, we need to focus on asset location, which is the key to annuities adding a benefit inside a portfolio. The purpose of the asset is more critical than the class. If the asset is intended to generate retirement income, you need to consider at least a portion in guaranteed income.
For most Americans, the promise of ongoing income – guaranteed for life – makes annuities one of the most beneficial parts of their portfolio. Don’t take my word for it! The power of guaranteed income can be proven through our tool, JourneyGuide. I encourage anyone to take their typical middle-American client and evaluate the use of guaranteed income in a $1 million portfolio. You’ll find a $275,000-$325,000 difference in total income increases for mass affluent customers.
Winning Strategy: Look at the true benefits of annuities in the retirement income strategy and not the recent headlines.
About the Author
Mike McGlothlin is a team leader, retirement industry activist and disciple of Indiana Hoosier basketball. In addition to being EVP of retirement at Ash Brokerage, he is a sought-after writer and speaker. His web series, “Winning Strategies,” provides insight and motivation for financial advisors in many forms – blogs, books, videos, podcasts and more. His latest book, “Free Throw for Financial Professionals,” is available now – learn more at www.freethrowsforpros.com.
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