Harnessing Fixed Annuities

As financial advisors and retirement planners, one of our most critical responsibilities is helping clients plan for a secure and comfortable retirement.

In pursuit of this goal, fixed annuities can be a powerful tool to provide a stable and predictable income stream during retirement.

For advisors who are just starting to work with annuities, here's a look at the benefits of fixed annuities and an outline of a step-by-step approach to incorporating them into your clients' retirement income planning.

The Product

Fixed annuities are insurance products that offer guaranteed income for a specific period or for life (for either single or joint life).

They are designed to protect against market volatility and provide a steady or potentially growing income stream during retirement.

By exchanging a lump sum for periodic payments, clients can secure a reliable source of income that can help cover essential expenses, medical costs, potential Social Security cuts and lifestyle choices during retirement.

How to Use Fixed Annuities in Planning

Here's a strategy for combining fixed annuities with other planning options.

1. Identify your client's retirement goals and income needs.

Begin by thoroughly understanding your client's retirement goals and income requirements.

Consider their desired retirement age, estimated life expectancy, anticipated healthcare costs, and desired legacy for their loved ones.

This information will lay the foundation for crafting an appropriate retirement income strategy.

2. Assess the client's risk tolerance and time horizon.

Determine the client's comfort level with market fluctuations and the client's capacity to absorb potential losses.

Fixed annuities are particularly beneficial for risk-averse individuals who prioritize stable income over potentially higher returns from market-based investments.

3. Determine the annuity allocation.

Once you clearly understand your client's retirement goals and risk profile, assess the appropriate allocation of fixed annuities within their overall retirement portfolio.

Consider existing retirement savings, other income streams (pensions, Social Security, rental income, etc), and any market-based investments.

Ensure that the annuity allocation aligns with your client's risk tolerance while also optimizing their overall retirement income.

4. Choose the right annuity.

With a myriad of annuity products available, selecting the right one can be daunting.

Consider the following factors when choosing fixed annuities for your clients.

Payout Options: Evaluate the different payout options available, such as a fixed period, life-only, joint-and-survivor, or inflation-adjusted options. Match the payout options with your client's income needs and longevity expectations.

Crediting Method: Understand the crediting method used to calculate interest rates on the annuity. Common methods include fixed interest rates, multi-year guarantee rates, or indexed strategies. Each method carries its own risk and return characteristics.

Insurance Company Strength: Assess the financial strength and stability of the insurance companies offering annuity products. Ratings from independent rating agencies such as A.M. Best, S&P Global Ratings or Moody's can provide valuable insights.

5. Manage the tax implications.

While fixed annuities offer tax-deferred growth, educating your clients on the potential tax implications is crucial.

Withdrawals made before age 59 ½ may be subject to a 10% early withdrawal penalty, and annuity income is generally taxed as ordinary income.

Help your clients navigate the tax landscape and structure their annuity strategy accordingly.

6. Regularly review and adjust.

Retirement planning has to be an ongoing process.

Schedule periodic reviews with your clients (I suggest annual reviews) to reassess their retirement income needs, evaluate the performance of the annuity, ask for referral business, and make adjustments, if necessary.

This ensures that their retirement strategy remains aligned with their evolving goals and changing market conditions.

Fixed annuities can play a vital role in helping your clients achieve a secure and sustainable retirement income.

By understanding your clients' needs, risk tolerance, and investment time horizon, you can effectively incorporate fixed annuities into their retirement income plan.

Remember to stay informed about the latest annuity products, monitor market conditions, and regularly review and adjust your clients' annuity strategy.

Doing so can give your clients the peace of mind they need to enjoy a financially stable retirement.

Tim Wood is a founder and broker at Safe Money Retirement.