Risks threatening guaranteed income
How annuities can help
Dispelling some annuity myths

When clients describe what they want in retirement, it usually translates to a guaranteed paycheck. But with pensions on the decline and Social Security providing only a small portion of income, what alternatives are available to provide the certainty they crave? You don't have to rely on the old 4% rule and hope the plan works. Annuities, where suitable, can be a tool that meets a variety of needs as part of your client's retirement strategy.

Risks threatening guaranteed income

According to the National Institute on Retirement Security, only 14% of Generation Xers have a defined benefit plan. With many Gen Xers retiring in the next two decades, financial professionals must think creatively about their clients' options. There are plenty of risks to navigate that could destabilize retirement income. Key among these are:

Longevity: The average American lifespan has increased steadily since the early 1940s. In 1943, the average American could expect to live until 63 years old. By 2018, that age had risen to 78. Income must last until then (and, for many Americans, much longer). As clients age, health-related costs will also likely increase.

Sequence of returns: Longevity and market volatility combined exacerbate the sequence of returns risk for those relying on the 4% rule to draw from an investment portfolio. The 4% rule also fails to account for fluctuations in spending needs, which are often higher earlier in retirement. Switching to a fixed income investment strategy presents its own problems when interest rates and/or inflationary risk increase.

Social Security: This benefit will be an increasingly small part of the guaranteed income equation. Americans are relying on Social Security for a larger portion of their income than ever before at a time of mass retirement, warns the Alliance for Lifetime Income. The math doesn't look good. There are also limits on when clients can draw Social Security benefits. Start before full retirement age, and the payouts reduce. Full retirement age increases gradually until it reaches 67 for those born after 1960.

As an investment instrument that pays a regular income, annuities should figure heavily in retirement plans as a way to generate guaranteed income.

How annuities can help

These risks make it even more important to plan for a level of guaranteed retirement income. Annuities are a valuable but often overlooked guaranteed income instrument for retirees. They can cover all or part of a client's inflexible spending costs in retirement by complementing social security payments.

By covering inflexible expenses, annuities are a form of insurance that helps reduce these risks to clients' retirement incomes. For example, a life-with-period-certain annuity provides a lifetime income for clients regardless of life span, removing the longevity risk.

Dispelling some annuity myths

You may have some misgivings about annuities. For the most part, common misgivings are actually misconceptions. Here are a few:

Cost: Think fees are too high? Remember that the client is paying for valuable benefits (this is insurance, after all). Fees range, helping you find the best balance between cost and benefits for your clients' needs.

Inflexibility: Another common myth is that clients cannot withdraw money from deferred annuities in the accumulation phase. In reality, there are annuities with built-in options for greater control. Clients can buy riders that provide guaranteed withdrawals before distribution begins.

Market exposure: Some worry that an annuity will cut them off from potential investment returns. The reality is that there are some offering market exposure, and some that do not. Clients wanting market exposure can purchase variable annuities with a guaranteed lifetime withdrawal benefit rider that provides a minimum annual withdrawal amount. In some cases, they can also buy riders that hedge against the inflation risk from a fixed annuity payout.

Complexity: Annuities often seem complex, but this is due to the flexibility that they offer. There is an annuity to suit everybody, according to their risk tolerance, cost constraints, and level of financial certainty.

It is also important to remember the value that an annuity contract brings. As a form of insurance, it offers valuable protection to the client long into retirement.

Financial professionals owe it to their clients to present the benefits and drawbacks of annuities while educating themselves on the realities of this useful asset class. In many cases, an annuity is the optimal instrument for providing a level of guaranteed income that people need for certainty in retirement. Annuities leave clients free to pursue their broader retirement aspirations safe in the knowledge that their basic living costs are covered.

Planning for regular guaranteed income in retirement delivers certainty while leaving retirees free to enjoy their third act. Learn more about how guaranteed income can help your clients in retirement.