Annuities can play a number of roles in your client's retirement income strategy. However, there is often a degree of confusion among advisors and their clients about if and how to use annuities.
At last week's Morningstar Investment Conference, annuity experts Wade Pfau and Spencer Look discussed a number of these concerns and offered ideas as to how annuities can fit in as part of a diversified retirement investment portfolio.
The Panel
Aron Szapiro is Morningstar's head of government affairs and previously served as head of retirement studies and public policy.
Wade Pfau, Ph.D., CFA, RICP, is a leader of the Retirement Income Style Awareness profiling program and has been a longtime professor at The American College of Financial Services and program director of the Retirement Income Certified Professional designation. He holds a doctorate in economics from Princeton.
Spencer Look, FSA, is associate director of retirement studies at Morningstar. He conducts research across many topics but primarily focuses on annuity and life insurance products and lifetime income solutions.
Here are some highlights from the session.
Main Types of Annuity Payouts
Look offered an overview of the two main ways annuities pay out: deferred annuities, which have an account balance, and income (or immediate) annuities. Both types can be utilized to provide a stream of retirement income.
One of the main issues with income annuities, Look noted, is that once the money is annuitized, it can be hard to get that wealth out of the contract.
Deferred annuities also can offer a number of riders for things such as long-term care, guaranteed death benefits and lifetime withdrawals.
Models for Fee-Only Advisors
The discussion moved to annuities geared to fee-only and fee-based advisors. Pfau indicated that annuities have traditionally been commission-based, but he has seen a trend in recent years toward annuities that have stripped the commissions out.
This is more prevalent with deferred annuities with an account balance. Some issuers have created a framework where advisors can charge a fee on the annuity account balance in much the same fashion as the other assets they manage for the client.
Retirement Income Styles and Tradeoffs
Szapiro guided the discussion toward retirement income styles, or strategies, and their accompanying tradeoffs — real or in the client's mind.
Pfau addressed several things that advisors should consider with their clients. For one, "the idea of a tradeoff between meeting a spending goal versus not being able to provide a legacy" is misguided, he said.
"With the conversation around annuities, it's important to remember it's not all or nothing," he said. "It's not, 'Do I put everything in the annuity or do I put everything in investments?'"
Speaking of tradeoffs, Pfau added that investors should think about annuities as a fixed income replacement.
