Income Annuities

Most financial advisors focus on the accumulation of assets. When it comes time to spend those assets, many people are asking questions that receive limited response. The art and science of asset distribution is not completely understood by the advising community. Upon close inspection and detailed analysis, it is evident that income annuities will play a major role in a sound strategy for retirees.

Traditional financial planning dictates broad asset allocation in fixed income holdings ranging from cash to bonds and large cap securities. Income is usually derived using a basic formula that suggests withdrawing a small percentage (usually 4%) of those assets annually to meet living expenses.

This is considered a general framework for asset distribution because it generally works. There are, however, several pitfalls with this approach. Namely, risk is never fully eliminated.

In a plan that should span 20-30 years, risk should be eliminated if at all possible. Depending on the amount of risk retained, the likelihood of serious future changes to the strategy increase accordingly.

Income annuities are most likely the safest products that retain growth potential backed up by contractual guarantees from stable financial institutions. Let’s take a look at a few options to see how the use of income annuities can decrease the risk of loss in a retirement income portfolio.

Variable Annuities With Guaranteed Income Riders- These annuities are often derided as too expensive to be worthwhile. Mainstream thought on this topic has shifted greatly since the 2008 financial market disaster. Owners of these contracts have a certain level of future income guaranteed based on initial contributions.

Market fluctuations don’t negatively affect the income guaranteed benefit. During annuitization, market participation continues and positive growth can lead to increased income that becomes the new basis that is guaranteed to never decrease.

Immediate Annuities- This type of product will offer the highest level of income that a retiree will find anywhere. This of course means that it will take less money to guarantee the needed level of income. That gives an investor the option to reserve some money for other investments or simply lock in a higher level of income from the beginning. The downside is that the principle is surrendered to the issuing company at the outset so nothing is left to heirs when the contract owner passes away.

Fixed Annuities- Not usually considered an income product, fixed annuities offer an opportunity for continued growth and reasonable income. This is a great alternative to cash since you’ll likely receive at least double the rate of CDs and money market funds. The free withdrawal provision in each contract allows the owner to withdraw discretionary funds whenever needed. At the end of the contract term, the balance can be rolled into a new product or moved elsewhere. You maintain control with this strategy. Also, upon death of the owner, the account balance avoids probate and is paid directly to beneficiaries.

Depending on individual circumstances, one or more types of income annuities will probably help reduce risk and provide many options for guaranteed or maximum income.

Each income annuity product will have benefits unique to the individual that will make them appropriate or inappropriate for a given application. Competent advice is essential as well as a good education. Annuities are most often presented to a potential investor by a highly skilled salesperson. Proper education will help an investor tell the difference between a sales pitch and quality advice.