Annuities – What if You’re Wrong?

Is it time to consider annuities in your income planning strategies?

There are a lot of things going on today that defy logic and reason. The stock market’s current “irrational exuberance” was called out by the Feds in a recent article from Advisors Perspective.  Here are a few interesting quotes from the article:

“We seem to be living in the riskiest moment of our lives, and yet the stock market seems to be napping. I admit to not understanding it.”

“I don’t know about you, but I’m nervous, and it seems like when investors are nervous, they’re prone to being spooked. Nothing seems to spook the market.”

Is 3.3% the new safe withdrawal rate?

A WSJ article, published by Anne Tergesen last month, discusses a recent Morningstar report suggesting the need to lower the 4% safe withdrawal rate down to 3.3%.  She explains that “if inflation, which is at a 30-year high, remains at or near today’s level for an extended period, even a reduction to 3.3% could prove optimistic”.

Anne included several quotes from the Morningstar report and a few stuck out to me.

“It’s counterintuitive, but when the stock market and stock valuations are high, it’s the worst time to retire.”

“Many of today’s retirees will have to be more resourceful to support their income needs.”

“Assuming you hold 50% in stocks and 50% in bonds, you can withdraw 3.76% at the outset of retirement and still have a 90% chance of not running out of money over 30 years.”

Back to the logic and reason part of things. If you are supposed to sell high and buy low, is it time to consider taking some off the top to add a safety-net underneath? 

What is the cost of being wrong?

If you are projecting a client’s well being during retirement and offering them a 90% chance of success and are off target, what does that mean for your client?  If you are going to help clients have more confidence should an annuity be part of the portfolio?

Protect the Principal

Today you can get a guaranteed 2.25% 5-year rate from an A++ life insurance company. If you want some upside on your interest, while protecting your downside you can get a 1% guaranteed rate and link your future interest to market indices. If the market does have a steep discount, you have downside protection and when it rebounds you will join in some of the upside.

Income Now or Later?

For those needing income now you can compare a SPIA or deferred annuity with an income rider. If you don’t need income today, you can use a deferred annuity and shop for a SPIA when income is needed. This option is more suitable if you are expecting significantly higher interest rates down the line and are not sure when or how much income you will want. If you feel interest rates will remain low an income rider can be turned on down the line when you want income to start and may outperform the two-step process.  

Does your client agree?

Annuities are best suited to deal with an unknown timeline and return. An annuity can guarantee principal and lifetime income. Since the market is at an all-time high with many expecting it to come down, perhaps it is time to look at how an annuity can protect the downside and create lifetime income to instill confidence with your clients.

To learn more about how indexed annuities can help secure your client’s retirement in a low interest rate environment, launch the report below.

The Fixed Income Dilemma

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