Having a philosophy for knowing the difference between the best and worst annuities is crucial if you're helping retirees plan for retirement.
Products on the market come with unique features.
Some are better than others or make more sense for different financial situations.
Here's my position: For my own retirement income planning clients, an annuity must guarantee 100% safety of principle and, ideally, provide some income guarantees.
Other financial professionals may have different clients, and they may see things differently.
There are some scenarios where variable products can be useful for a client, depending on the client's risk tolerance, savings rate, and amount of liquid assets available to cover emergencies and income needs that could arise later on.
This article is not meant to push you away from selling the right variable products to the right clients.
But here are some things I look for when I'm evaluating annuities for my own clients, who tend to have a low level of tolerance for investment risk and not a lot of time or extra assets they can use to cope with investment losses.
1. Annuities Your Client Has No Control Over
One of the worst annuities for clients who want complete control of their investment is the single-premium immediate annuity.
An immediate annuity has a retiree use a lump-sum contribution to annuitize their savings.
This means the clients convert their savings into a stream of payments to support their retirement fund.
A single-premium immediate annuity might be a good thing if the owner of the contract has no heirs, owns a lot of liquid assets, and is only focused on locking in the highest income possible.
However, retirees may not be able to reverse the SPIA purchase process or get to the savings if they ever need the money back.
This investment option also tends to earn low interest rates and most likely won't provide a death benefit for the beneficiaries.
A better option for most of my clients is a deferred annuity with a lifetime income rider.
It offers more flexibility and earns interest, and beneficiaries receive the balance in a lump sum.
2. Annuities That Lose Money
My feeling is that the best thing about an annuity is getting a fixed investment option that generates long-term income.
That's why, in my opinion, advisors should generally steer clear of annuities that lose money due to stock market volatility, especially for retirees with little savings.
Traditional variable annuities and registered index-linked annuities are two of the most common "losing" annuities.
When your clients own those types of annuities without adding benefits guarantee options, the market's up-and-down movement can cause the payout to increase or decrease unpredictably.
I believe that buying an annuity without principal or income guarantees defeats the purpose of guaranteed savings.
To be fair, in certain cases, a variable product may be appropriate, such as when a client has plenty of emergency savings, as well as some type of guaranteed income plan to cover future expenses if things go south with their other investments.
But most of my retired clients want to avoid taking on such high risks when they're retired.
Fixed and fixed indexed annuities aren't affected by stock market volatility.
