Finding the right annuities to meet retirement needs

by Leo Almazora08 May 2019

In a recent survey, AIG Life & Retirement found that 53% of Americans plan to live until they’re 100 years old. However, 51% said they were uncertain that their current retirement savings plan would financially sustain them through a 100-year lifespan, and 59% said they feared running out of money more than death itself.

To get through such an extended lifetime — which is increasingly possible, given the rising life expectancies across the world — retirees will need to rely significantly on protected income. The necessity for such income rises when one considers other risks from historically low interest rates and the probability that severe stock market volatility will erode or wipe out investment returns.

“If your client doesn’t have enough protected lifetime income to cover their essential or discretionary expenses in retirement, they could be facing an income gap and may need your help,” wrote Bryan Pinsky, AIG’s senior vice president, individual retirement products, in a piece for InsuranceNewsNet.

Pinsky noted that protected income in retirement will likely involve some combination of social security, pensions, and lifetime income products such as annuities. After a conversation about their risk tolerances and specific needs, advisors can choose from different types of annuities to find one that best suits a client’s needs.

As a hypothetical example, he gave the case of a man who seeks to maximize long-term growth potential of his US$1-million nest egg; however, a comparison of his projected retirement income need and his protected income sources reveals a US$20,000 shortfall. By allocating US$250,000-US$400,000 to a variable annuity with a guaranteed lifetime withdrawal benefit, Pinsky said, the client could cover the income gap and get the long-term growth potential he wants.

“This strategy also allows the balance of the client’s overall portfolio ($600,000-$750,000) to be invested with less worry because their identified income needs are now covered with guaranteed income,” Pinsky added.

In another example, he explained how a single 62-year-old seeking to retire in five years could get retirement income that is protected from market downturns and has the opportunity for growth. “He allocates a portion of his retirement savings to purchase an indexed annuity with a guaranteed living benefit rider,” he said. Once withdrawals start at age 67, the man’s income can keep growing with annual income credits that match any interest earned. Even if the contract value gets depleted, the income is locked in for life.

Guaranteed lifetime withdrawal benefits are another desirable feature, and they come with certain fixed annuities. A 65-year-old woman who aims to retire at 72, he explained, might want lifetime income upon retirement, along with the chance to generate more income that’s insulated from market downturns and the chance to access her money for unexpected situations. The woman could use part of her savings to buy a fixed annuity with a guaranteed lifetime withdrawal benefit; waiting seven years before taking any withdrawals would let her earn income credits, which would grow her future lifetime income.

“Ultimately, the goal is to help your clients retire without the worry of outliving their money,” Pinsky said, adding that factors like age, time horizon, and liquidity needs also matter. “By incorporating your client’s risk profile into their retirement income strategy and utilizing a protected lifetime income solution … you can help clients address their retirement income goals and retire with confidence.”