Using Annuities to Help Clients Prepare for a Comfortable Retirement

An important first step is to educate them about the various types of annuities available and how they can be used to help secure a comfortable retirement.

By Frank Medina

Many employed adults can envision the kind of life they would love to have after leaving the workforce, but how that lifestyle can be achieved is an issue that often weighs on their minds. In order to financially prepare for retirement so that we can live comfortably, it’s important that we know and understand the variety of options available to us. Annuities are one such option, and how they can serve as an investment tool that generates a sizable income for the future is something that financial planners must explain to their clients.

The following should be part of the information you share with your clients as you undertake the task of educating them about these valuable products:

What are annuities?

Annuities are insurance products that pay out an income to policyholders. Policyholders invest in an annuity, and on a future set date or series of dates, payments are made to them by the insurance company. The policyholder may receive payments every month, every three months, or annually. Another option is to receive an annuity in a single lump sum. Annuities are generally considered a form of life insurance because they provide a death benefit, and unlike equities, bonds or mutual funds, they are sold by life insurance companies rather than by stockbrokers.

The way they are paid out makes annuities an important component of retirement planning because they give retirees the comfort of knowing that they will continue to receive checks for as long as they live.

Advantages of annuities

There are several advantages to holding annuities, both from a tax perspective and an income perspective. There are no yearly contribution limits. This means that your clients can stow away large amounts of money while they have the means. Because they are tax-deferred, they don’t have to pay taxes on that money until after they retire. This means that their entire pre-tax investment compounds annually. And as stated, they have the flexibility to decide the frequency of the payout.

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Not only does an annuity ease anxiety and worry about retirement, it is also an

Types of annuities

There are two main categories of annuities: deferred or immediate, and within those categories, there are further options your clients can choose, such as fixed or variable. Below are the differences between the two options:

• Deferred annuities are annuities invested for a certain length of time until your clients are ready to withdraw. Payments are not made right away. Withdrawal usually occurs during retirement.

• Immediate annuities are annuities that release payment right after the policyholders make their first investment. As they get closer to retirement age, an immediate annuity may be more attractive.

• Fixed annuities: As the name implies, the payout is a fixed sum. They are annuities that increase in value based on stated returns within the written legal agreement.

• Variable annuities: The payout from variable annuities is tied to investment performance; as a result, the payout varies. Variable annuities allow policyholders to select from myriad investments, such as stocks and bonds.

Picking an annuity

When choosing an annuity, your clients have several factors to consider before signing any contractual agreement:

Cost

Cost tends to be the first factor people consider when choosing an annuity. How much does the annuity cost? Are there additional expenses? How are the investments scheduled? Is the total cost included in the upfront fee? Your client should ask these questions to ensure that the cost don’t outweigh the investment returns.

Flexibility

Your client should find out the extent of control they have over their investments. Some annuities cannot be changed.

Income Guarantees

The insurer may promise to make income payments, depending on the type of annuity.

Liquidity

Depending on the annuity, your client may be able to convert the annuity to cash with minimal or no loss in value. However, they may be penalized for doing so.

Longevity

This is based on the length of time withdrawals can be made and protection from longevity risk. Certain payouts will be higher or lower than others.

With the guaranteed income that annuities offer, it certainly makes sense for your clients to include them as part of their retirement planning. Not only does an annuity ease anxiety and worry about retirement, it is also an excellent way of maintaining one’s lifestyle after retirement.

Frank Medina is a life insurance and annuity specialist who has been able to help hundreds of clients plan out their future while being financially secure. Contact him at frank@frankmedinainsurance.com .