The Anxieties of Aging

Financing Longevity

How advisors must continually educate their clients on protecting income for a lifetime

by Anne Machesky

Ms. Machesky is a financial advisor with Sagemark Consulting in Edina, MN, and a registered representative and investment advisor representative with Lincoln Financial Advisors Corp., a broker/dealer (member SIPC) and registered investment advisor offering insurance through Lincoln affiliates and other fine companies

As a financial planner for more than 35 years, I wear many hats when it comes to interacting and engaging with my clients – friend, confidant, sounding board. But one of the most important roles we play with our clients is educator. With the ongoing and growing retirement wave in America, it has never been more important than it is right now to ensure our clients understand not only the criticality of saving for a sound retirement, but the necessity of having a solid income strategy for when they step into their post-career life.

Unfortunately, many people do not understand their options when it comes to dependable income. And one of the least understood options out there is the annuity. Even those who own annuities are often confused by the various flavors, considerations, benefits, considerations and how tax status, interest rates or market events can affect the performance of these investments and how the income they generate can be best accessed in retirement.

Given their ability to fill an important need for guaranteed income as part of any investment strategy, we know annuities can play a critical role in comprehensive financial planning for a lifetime. But as planners, it’s sometimes difficult to introduce them as an option for clients who may have pre-conceived notions of annuities or misguided perspectives on their value

Here are four ways to discuss annuities with clients as part of a post-retirement income protection plans:

Social Security Is Not The Answer

More Americans are retiring, or planning for retirement, daily and the need for sustainable lifetime income has never been greater. As the Baby Boomer generation ages, many of them need to address their financial preparedness as they approach retirement. According to the Employee Benefit Research Institute (EBRI), an independent, nonprofit, and nonpartisan organization that studies health and retirement benefits, 86% percent of current workers say they expect Social Security to be a major or minor source of income in retirement, but they say they believe that personal savings will also play a large role.

Although many workers expect to rely on Social Security, they are not confident that it can provide the same benefits throughout their retirement. The study also points out that just 37% of workers say they are very or somewhat confident that the Social Security system will continue to provide benefits of at least equal value to the benefits received by retirees today, including just 6 % who are very confident.

Financial advisors have long known about the potential of stress that may occur on Social Security and pension payments, and we’ve been telling our clients about it for quite a while. However, each month the stakes seem to grow higher. Proactively taking steps to educate clients, especially those nearing retirement, about the need for guaranteed income strategies has never been more important.

But, Clients Have Options

Many Americans are approaching their retirement without a plan to receive sufficient income after their work paycheck stops coming, even though most believe their savings will sustain them. But there’s no magic switch that we hit after we retire that looks across our investments and shoots us a generous and never-ending stream of income each week or month. Even the best retirement saver needs a retirement income plan that will deliver the confidence they’ll never outlive their savings.

That’s where financial planners come in.

To help a client determine if an annuity could be an option for retirement income, I share with them a few of the many features and benefits, including flexibility in payments, payout options and the benefits of potentially accumulating tax-deferred earnings. However, I also inform clients that some important restrictions apply to withdrawals from annuities, including surrender charges or penalties assessed on an early withdrawal and income taxes applied to earnings on the amount withdrawn. In other words, just like any investment, there are pros and cons to owning an annuity depending on needs and goals.

On the upside, an annuity with a living benefit rider (for an additional cost) can offer clients a predictable level of income for the rest of their life. And certain annuities also can be particularly attractive to people who are worried about outliving their savings as well as those who want to make sure that their beneficiaries will continue to receive payments even if they die.
On the downside, the “fee” for ensuring lifetime income that never runs out tends to be higher, and come with more caveats, then more well-known vehicles, such as IRAs or mutual funds, which do not offer a guaranteed income stream and, in fact, may carry significant risk based on market performance. And, like any insurance-based option, the “guarantee” is only as good as the ability of the insurance company to pay it, so I always advise my clients who purchase annuities to do so from established, reputable, well-rated companies. Guarantees are subject to the claims paying ability of the issuer.

Annuity Is Not A Bad Word

Financial advisors have long known about the potential of stress that may occur on Social Security and pension payments... we’ve been telling our clients about it for quite a while. However, each month the stakes seem to grow higher

Once clients understand the value proposition for annuities – the potential for guaranteed income regardless of market performance – the conversation becomes a bit easier. Then the fees, restrictions and penalties become simpler to explain.
To help them gain a better understanding I always try to point them to credible studies and sources, including the Government Accountability Office’s (GAO) Impacts of and Regulatory Response to the 2007-2009 Financial Crisis study. In the study, the GAO reports that fixed annuities were largely unaffected by the 2008 financial crisis.

Of late, I also have begun referring clients to the Alliance for Lifetime Income, a new organization working to simplify the annuities discussion for American consumers by educating consumers about the importance of lifetime retirement income at

Keep It Clear

One of the largest obstacles to investing in annuities that I have seen is how difficult it is to explain them and understand them well. Keeping it simple for clients is critical.

To help clients understand annuities, I stick to the basic concepts:

  • An annuity is a contract between a client and an insurance company.
  • Annuities can be tax-deferred, meaning that clients don’t pay income taxes until they start making withdrawals from the account.
  • Tax-deferred annuities have two phases: an accumulation phase and a distribution or payout phase. During the accumulation phase, they contribute either in a single lump-sum payment or through ongoing premium payments, and those investments have the potential to grow in the account tax-deferred. In the distribution phase, they start withdrawing income, which then becomes taxable based on the earnings realized during the accumulation phase.

Depending on the client’s objectives and risk tolerance, there are other types of annuities to consider – each with their own value proposition. Fixed annuities offer a guaranteed rate of return for a specified period, and the amount of the guaranteed payout depends on the amount paid in during the accumulation phase. Because it’s an insurance product, basically guaranteeing a predictable income stream, a fixed annuity may include an early withdrawal penalty and surrender charges if not held long enough. That’s why it’s important that I make sure my clients understand that this product is best for people who want the predictability of income over a set amount of time vs. the ability to access more liquid savings, which typically can’t provide that same income guarantee. That’s also why I typically recommend that annuities are just one component of a retirement income strategy, which also could include more readily accessible investments and savings.

Variable annuities are long-term investment products designed for retirement purposes and are subject to market fluctuation, investment risk and possible loss of principal. Variable annuities contain both investment and insurance components and have fees and charges, including mortality and expense, administrative and advisory fees. Optional features are available for an additional charge. Like fixed annuities, variable annuities are also subject to early withdrawal penalties and income taxes upon distribution and surrender charges if not held until the surrender charges are eliminated. Variable annuities can offer tax deferral, lifetime income and death benefits, as well as riders that may be available at an additional cost. Variable products are sold by prospectuses, which contain the investment objectives, risks, charges and expenses of the variable product and its underlying investment options. Read carefully before investing.

Protected Lifetime Income Ensures Retirement Stability

Headlines have screamed for years that Americans are unprepared for retirement, but the focus has primarily been on savings. For planners like me who have disciplined clients who have taken the steps to save, the need to prepare is more focused on ensuring they have a sound income strategy for retirement. Annuities can be an important component of that strategy, which is why it’s so critical that, as planners, we have the facts and the confidence to be able to have a plain-English discussion with our clients about the pros and cons based on their income goals.

Depending on a client’s income requirements, retirement savings, and desire for beneficiary care, annuities can be an important and well-suited option as part of a broader retirement investment strategy. While investments may grow or lessen with the markets, annuities can provide a dependable income stream. ◊