Annuities

The Transition Phase


Annuities

Annuity sales typically fit into one of three categories: accumulation, distribution or wealth transfer. However, with the rise in the importance of retirement income planning and all of the income riders now available, there is another category: transition.

Individuals who are 5-10 years from retirement are usually considered to be in the transition phase. These clients have a few more years to invest for growth before they need to start their retirement income stream.

Think about this hypothetical client:

  • Age 60
  • Starting income at age 65
  • Depositing $100,000 into an variable annuity

Assuming a 9.2 percent compound rate of return, in five years the variable annuity would be worth $155,000. At a 4.5 percent payout rate, it would generate a lifetime income of $7,000 annually.

Now, take the same client and invest his $100,000 in an indexed annuity with a lifetime income rider. This client could be better off because even in a Doomsday scenario the indexed annuity should perform at least equal to the variable annuity, while keeping the charges much lower than traditional VA fees and expenses.

With so many income rider options available on indexed annuities today, it can sometimes be a challenge to determine which rider is the best choice for your clients in transition. At Ash Brokerage, we take great pride in the fact we are one of the largest independently owned marketing organizations in the country and always work to make sure we are recommending the product that is most suitable for each situation.

Generating Income


Annuities

In today's current interest rate environment, have you ever wondered what it would take to generate $10,000 in annual income?

According to BankRate.com, the current national averages on one-year and five-year CDs are .23 percent and .78 percent, respectively. The highest rates are 1.10 percent on a one-year CD and 2.30 percent on a five-year CD. The 10-year treasury is approximately 2.58 percent.

At those yields, this is what a lump-sum deposit would have to be to get $10,000 a year in annual income:

.23% $4,347,826
.78% $1,282,051
1.10% $909,091
2.30% $434,783
2.58%    $387,597

 

With an indexed annuity, executing the guaranteed income rider after one year, a 65-year-old client would only need a deposit of $166,800 to generate the same $10,000 a year in annual income.

With so many investment options, an indexed annuity with an income rider may be a good solution for your clients to help them overcome this low interest rate environment.

What if you don’t act?


Annuities

Many articles and news reports have covered the Federal Reserve's concern about the apparent investor complacency bubble. Based on the market, I believe it to be a legitimate concern. We have higher than normal price-to-earnings ratios and all-time market highs, and the annuity industry is similar to that of the pre-financial crisis. 

Given that the normal P/E ratio is around 16 for the S&P 500, we are approximately 20 percent overvalued in the stock market. When you look at the Baby Boomers, how many can sustain their standard of living if their retirement assets decreased by 20 percent in the next 90 days? My guess is many would suffer a nearly unrecoverable decrease in their standard of living. 

More importantly, what is the psychological effect on those pre-retirees who have been battling to get back to their pre-financial crisis retirement accumulation? This generation has spent the last decade pushing a large boulder up the hill. Boomers have felt the impact of 9/11, the technology bubble, the financial crisis and now an apparent complacency bubble. Why would we let our clients continue to make the same mistakes? 

It's time we stop waiting for interest rates to increase or for there to be a "better deal." Doing nothing only perpetuates the risk that is already being taken. If we don't protect our clients’ assets and wealth, they’re likely to repeat the same errors over and over again. Let's get off the merry-go-round and help them. 

You should ask for meetings with your top clients to talk about taking their risk off the table and protecting their wealth. If you don't, someone else might do it for you.

Safety and control


Annuities

In a well-documented study decades ago, British scientists set out to determine how a worker's position on the corporate ladder corresponded to their stress level. It was assumed that more responsibility led to more stress, which in turn led to more incidents of serious health care issues.  

The Whitehall Studies produced some interesting findings. Workers higher on the corporate ladder were actually less stressed, due to the amount of control they had during the day. And a worker’s responsibility had nothing to do with stress-related health issues. 

I would argue that the same can be said about retirement planning. The amount of money involved is irrelevant. When an individual feels uncomfortable about their income stream, that uncomfortable feeling translates into stress, which increases the probability of problems.  

Imagine your stress if you become a burden to your family members. Unfortunately, that stress will begin to form many years before you run out of money or have health issues. Without guaranteed income, you risk being a burden. Because of risks like this, a retiree's stress level can become unbearable.  

Income annuities can prevent most of this stress. While the return is not in the range of equities, the power of safety promotes comfort and control. When individuals feel in control of their future, they feel less stressed.  

Just as control at work could ease a worker’s stress, I believe Americans would benefit from the safety and comfort of a conversation with their financial advisor.   

Increasing Income in Retirement


Annuities

The following is a guest contribution by Randy Kitzmiller, Regional VP of Annuities for Ash Brokerage.

If your clients want to maintain their standard of living throughout retirement, they need increasing income as part of their strategy. 

Take for example a couple, both age 65. It's likely that one of them will live an additional 24 years. If you use the Rule of 72 at a 3 percent inflation rate, they will need to DOUBLE their income in those 24 years to keep up with the same standard of living. 

The math doesn't quite add up with a variable annuity with a high water mark strategy. If they have an income value of $1 million and a 5 percent payout, they start with $50,000 of income. For their income to increase to $100,000 in 24 years, they need the income value to grow to $2 million. While mathematically this sounds possible, donít forget that they have to overcome a 5 percent withdrawal, fees of up to 3.5 percent and any market loss. 

Using an annuity income strategy gives you much better odds. Your clients will get an annual reset in the income and accumulation phase, and approximately 77 percent of the time, they would receive an increase in income. 

Don't wait 24 years to find out if your clients have enough income. Increase their odds and income by looking at different annuity strategies today.