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Planning retirement income | When are annuities a RightFit™ for your client? 

What to do about the high cost of investment income

A recently published article titled: “What to do about the high cost of investment income” discusses the challenge of producing income from your investable assets.

In their article authors Michael Finke (professor at The American College of Financial Services) and David Blanchett (head of retirement research for Morningstar’s investment Management services) warn against reaching for yield in all the wrong places. 
 
“Retirees are a behavioral bunch. Only 22% of retirees plan to spend down their financial assets, 32% plan on maintaining their financial assets by withdrawing only earnings, and 22% plan on growing their wealth. This approach is not realistic today. Behavioral investors who want to cling to the notion that principal must be preserved will reach for yield by purchasing lower quality bonds or higher dividend paying stocks. Neither approach is likely to end well.”
 
 
What keeps you from recommending an annuity to your client?
 
TIAA has been advertising the ability for you to make your own “pension”.  They offer your client the ability to obtain quotes on their website for guaranteed lifetime income (aka a single premium immediate annuity or SPIA).  There is no doubt TIAA recognizes the word “annuity” as a turn-off in the marketplace, so they use “income for life”.  When you ask clients if they like their social security and they say yes, they are often surprised to learn they already have an income annuity.  TIAA’s lifetime income calculator is provided below.
 
TIAA lifetime income calculator
 
Today, a lot of clients are concerned about the erratic market.  They want to park their money somewhere safe and decide how to tap it for income later.  There are two ways to utilize annuities in this manner.  (1) You purchase a deferred annuity which you later annuitize, or (2) you purchase an annuity with an income rider and turn the income on when you are ready.  You protect the principal and grow the money and or benefit base to allow for income later. 
 
One of our annuity carriers now allows you to access guaranteed income values via their website.  This tool can help you discuss the potential for having some guaranteed lifetime income, or as TIAA touts it their own “personal pension”. 
 
Guaranteed Income Calculator
 
 
7 Retirement Income Planning Risks
 
Like them or not, an income annuity is uniquely situated to provide guaranteed lifetime income and peace of mind for your client.  Wade Pfau published an article discussing 7 Retirement Income Planning risks to contend with.

  1. Reduced earnings capacity – reduced ability to earn income to cushion standard of living
  2. Visible spending constraint – retirees must try to create an income stream from existing assets
  3. Heightened investment risk – retirees experience heightened vulnerability to sequence of returns risk
  4. Unknown longevity – the fundamental risk of retirement comes in the form of unknown longevity
  5. Spending shocks – unexpected expenses and exposures and contingencies are hard to plan for
  6. Compounding inflation – inflation will erode the purchasing power of their savings
  7. Declining cognitive abilities – a retirement income plan must take into account that many will have declining cognitive ability.

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