Advisors and clients who have adopted basic investment strategies may be weathering the current economic crisis a little better than most. One of those strategies deserves some close-up attention: guaranteeing income with annuities.
Many of the stories that have been in the media in the last few months have been heartbreaking. Retirees or those planning to retire this year are faced with the loss of a large portion of their retirement nest eggs. So, they either have to return to work or delay retirement, in the hope that their retirement account values will go up enough to allow them to retire at some point.
Once those account values recover, advisors can help those clients realize the value of having a steady stream of income that can be depended upon when withdrawing money from mutual funds or from other more volatile assets that could cause disastrous losses. That income stream can be provided by fixed annuities.
It's no secret that most annuity owners don't take advantage of using their annuities to create an income stream through annuitization. When most deferred annuity owners need to start using the cash value of their annuities, they either take periodic withdrawals or surrender the annuities.
Knowing that, advisors may want to consider advising clients to use a different approach. Specifically, they may want to recommend that retirement-bound clients annuitize their deferred annuities to provide a steady income stream to help cover mandatory expenses in retirement not met by pensions or Social Security payments.
If the current annuity is not sufficient to cover mandatory expenses, then the client may want to purchase an additional immediate annuity, with payments beginning within the year.
Most experts advise against having more than about a third of assets devoted to annuities. However, the amount of assets that any individual client would place in annuities depends upon how risk averse the client is and how much of an income stream is needed to meet mandatory expenses.
