Annuities are not just for people who need them. Lots of people want the security that only annuities can provide. A recent case came across my desk as a referral from a past client. Two couples enjoyed living in the same retirement community and only one had been working with me for the past five years. The couple I didn’t know was interested in learning more about why the couple I did know had little concern for their own long term financial security. I have worked with Brian, who spells his name the wrong way, since 2018. He was an early adopter of the Flex Strategy and it kept him flexible enough to stay on top of market changes to this point in his retirement.
One of the best benefits of my job is that I get to meet people who have made a living by specializing in different areas. Brian is, by all accounts, an intelligent person of a very technical nature. I almost feel like I’m talking about myself but don’t forget the misspelling. As with many other people, I thoroughly enjoyed working through the process with him with the result being that he could choose what he thought was best. We recently made some changes to his plan that would set him up for the long run and he seems very happy about it, which is why he was explaining it to his friends.
Initially, this couple wanted to talk to me about a couple of annuities they already own. I invite every opportunity to do this because it’s one of the reasons I learned so much about this business. Both contracts were surrender free but it made sense to find a new home for only one of them. The other had a sizable death benefit on top of the cash value and it wouldn’t make sense for them to give that up. It’s a relatively small amount of their assets so I felt it best to leave it right where it is.
The couple has ample savings for retirement and I soon learned that they were trying to solve a larger problem. A large part of their income needs were discretionary spending and they had thought about securing some guaranteed income to take care of it. The comment that stuck with me came when the wife said, “I just want to be able to sleep at night.” Since I don’t have an agenda and it happens to be my specialty I took this as a good opportunity to show them all the options. There is basically a podcast for each of these options but this one should wrap it all into one.
I’ve talked a lot about all the things a person can do besides annuities but they already had all of that as elements of their plan. There was no need for an annuity but it would take less than a quarter of their assets to guarantee it in one form or another. Annuities are the only asset that can do it in a way that guarantees you will be able to sleep at night. This is also the type of case where a lot of other advisors would get tunnel vision and pitch hard his/her favorite product. My goal is to make sure that we don’t end up having a difficult conversation a few years down the road. I’ll make damn sure that everyone knows exactly what they are getting from me so we remain on good terms no matter the outcome.
There are four ways this couple can enjoy sleep-at-night money. Remember this is a reasonable amount of their assets so this is why all four options are available. Others may have different requirements or limitations that reduce the feasibility of certain strategies. These guys have already built plenty of flexibility so all options are on the table. The choices they have and benefits of each are as follows.
Option 1: Guaranteed Income Annuity w Fee
This would produce the highest amount of guaranteed income for the amount of money invested. Companies charge a fee to set aside enough money in reserves to ensure the pool of people taking payments remains solvent. The account is indexed so there is a remainder cash value that can be passed onto heirs but these contracts are not built to grow much. With high payments and fees the remainder doesn’t last long. It also needs to be mentioned that a single premium immediate annuity will pay higher in many cases but it creates a problem with required minimum distributions. This is a topic worthy of its own podcast so I’ll address it in more detail later. If guaranteed income is the singular goal then they could get by with the lowest investment amount here to provide their guaranteed sleep-at-night money.
Option 2: No Fee Guaranteed Income
There’s a podcast that directly compares this product to the one above. No fee is paid for the guaranteed income rider so the income you can expect to receive is lower. For every year of deferral, income increases are based on the performance of the index accounts. When the contract performs there is a boost to income. Because of the lower income guarantee, the company puts more value on the growth side of the contract. With lower income payments and more robust growth potential there is a good chance of having a very high remainder. Even if a legacy isn’t your goal, the improved growth can open up plenty of flexibility for future planning opportunities. This is a good option for this couple because they had planned to protect more money than is needed to secure the income guarantee. They can enjoy a solid level of sleep-at-night money while also keeping their options open. It’s like a growth annuity with the back stop of guaranteed income, offering something valuable even in the worst case scenario.
See the comparison between options 1 & 2 in Episode 78 Guaranteed Income: With or Without Fees?
Option 3: Flexible Withdrawals Using Accumulation Annuity
This is not the strategy to maximize income. It can be done with either fixed annuities(MYGAs) or fixed indexed annuities. MYGAs can produce guaranteed results for a set period of years but are not always ideal for long-term planning. Fixed indexed annuities are the same because cap and participation rates are adjustable annually meaning things can work out quite a bit differently than initially projected. It is a great strategy for the couple in this example because income needs are a small percentage of planned premium and this investment would take less than 25% of their assets. Be careful to avoid advisors who get carried away trying to win an illustration battle. I covered this in Episode 81 BS Annuity Illustrations. It really only works for discretionary income and for those who can risk an unknown outcome. The principal is never at risk but the outcome is. I’m a big fan of this strategy and not at all afraid to say I was the one who invented it but with rich payouts available elsewhere I’m recommending it in fewer situations. This case is one where it would definitely work for some sleep-at-night money.
Option 4: Mix and Match
Lots of people have a hard time deciding when each of two options is appealing. Choosing to use two of the above options and splitting the annuity purchase is a good solution. Pay a fee and maximize income with half the money and keep the rest more flexible and with greater growth potential in either of the other two. Because our example couple is in just the right financial position, this is a good compromise if one of the others isn’t everything they are looking for.
I’m going to keep saying that it’s very important to first settle on a strategy. This couple is sophisticated enough that I did send illustrations of each example. Most first-time annuity shoppers are not familiar enough with insurance contracts to do this without getting thoroughly confused. It’s not a knock on anyone, just something I’ve learned after 21 years. Avoid the complexity of the product first approach which often comes with overhyped illustrations that could lead you down a very risky path. It’s my job to make sure that everyone ends up using the tools that work the absolute best based on situation and preference. It’s your job to follow along and do a little work so your retirement doesn’t suffer for it.
Feel free to reach out if you believe that approach is what you need.
Podcast Episode: Sleep-At-Night Annuities
Last Updated on February 2, 2024 by Bryan Anderson