Today’s Annuity Solutions

Piecing Together The Annuity Puzzle

Benefits of annuities in today’s marketplace

by Mike Janky

Mr. Janky is a Registered Investment Advisor and principal with MJ Wealth Planning, in Tucson, AZ. he holds multiple designations including Chartered Financial Consultant, Chartered Life Underwriter, Chartered Advisor for Senior Living, Retirement Income Certified Professional, Registered Health Underwriter, Certified Fund Specialist and Certified Annuity Specialist. Visit https://www.mjwealthplanning.com/.

Annuities can trace their origins all the way back to Roman times. One of the earliest recorded uses of annuities date back to 1720. It’s safe to say annuities have stood the test of time. Over the last 300 years, there have been many changes to the annuities to what is currently offered by insurance companies today. When using annuities for retirement planning purposes, there are several reasons a client should consider placing some of their money into these products. This article will discuss a few distinct types of annuities and where they may be a good fit.

Current State Of The Stock Market

As of this summer, the S&P 500 is currently down over 20% for the year. With a multitude of headwinds facing the market such as rising interest rates, rising inflation, the war on Ukraine, China’s lockdown and so-on, many financial experts are predicting a continued decrease in the overall value of stocks through 2022 and beyond. As people near retirement, the thought of losing principal and not being able to replace those losses with earning from employment can be very unsettling to stay the least. The stock market had been on an extended bull run since 2008 and now appears to be giving some back. If a person isn’t invested in equities, what other options do they have to try and get a solid return on their money and a fighting chance to at least keep up with inflation. The first possibility we will look at is an indexed annuity.

Indexed Annuities: Best of Both Worlds

Indexed annuities have been around for nearly 30 years. In the spring of 1995, a couple of insurance companies released the first types of these products. When they first were offered, many planners and clients questioned why you would give up all the upside of being in the market for protection on the downside.

That seemed like a fair question. The stock market had a fantastic decade in the 1990’s and the few years it was negative during that decade, it was only by a small percentage. The next decade from 2000 to 2010 was a completely different story. As technology stocks were soring in the late 1990’s, the tech bubble was about to burst. Beginning in March of 2000, the stock markets started to show signs of weakness and over the next 10 years, would continue to be volatile and in 2010, the S&P 500 had lost nearly 20% of it’s value over that 10-year period.

This is exactly why the indexed annuities can be a fantastic fit for some of your client’s money. Over that same 10-year period, the indexed annuities outperformed the stock market. With these products, you never partake in the downside of the index you are linked to. You are not actually in the market but instead linked to an index that will determine the amount of interest you earn. So as the market was heading south, the indexed annuities were holding steady.

During years where the market had taken a big loss, the annuities simply returned zero interest but then were allowed to reset for the next indexing period. Most of these products were one-year resets at that time. There were three years during that decade that the S&P 500 had some excellent returns. In 2003, the index was up over 20%. 2006 saw a double-digit return and in 2009, the index was again up over 20%. During these years, the policyholder would have received part of those gains credited to their contracts. Having part of the gains without any of the risk is the key component of these products.

For younger clients that are still working, these products may not have the appeal of being in the market. Two of the greatest assets an investor will ever have are the amount of time to invest and the ability to replace losses with earning from their chosen professions. Once a person decides to leave the working world, they have just lost one of those assets. Most people that have retired also have a shorter time horizon for investing. If we have another period of volatility like we did in the early 2000’s, will they have enough time to make back those losses? Using indexed annuities for part of the overall investment strategy can bring some peace of mind to those that are about ready to retire. If the market does rebound, they will receive part of that gain and if the market continues to correct, they won’t be watching their assets allocated in the annuity lose value. If positioned correctly, it can provide a base for a solid retirement plan.

MYGA’s-Are They Worth Looking At?

There is no special formula that works for every client. The key to helping clients reach their retirement goals is to have a good factfinder to start with. Each client will have different goals and concerns...

Over the last few years, the multi-year guaranteed rate annuities offered in the marketplace were less than exciting. These annuities credit a guaranteed rate of interest for a specified period. With the Feds raising rates at an alarming rate in 2022, the insurance companies have been able to follow suit and increase their rates on these products to more attractive levels. On a 5-year MYGA, your clients can receive guaranteed interest of over 4% each year. This is a significantly higher than just a few months ago.

Many experts predict rates to continue to rise in the coming months. With banks currently offering minimal interest on savings and checking accounts, these MYGA’s can provide a much higher rate of return. With the MYGA’s, there are no surprises. You earn the guaranteed rate for the length of time elected and after that period, you are free to either take your money and move on or renew at a new rate. The MYGA’s can also be a better choice for some than bonds. With rising interest rates, many bonds and bond funds have taken a fairly good beating so far in 2022. If rates continue to rise, it will get worse for bonds before it gets better. When considering using MYGA’s, keep in mind that much like the indexed annuities, MYGA’s can provide peace of mind and help clients earn a respectable amount of interest on their money that is guaranteed.

SPIA’s- The Income Piece Of The Puzzle

With Single Premium Immediate Annuities, the focus on these products in creating guaranteed income either over a certain period, or over one’s lifetime. Much like the MYGA’s, they are very interest-rate sensitive and up until 2022, they were not crediting much at all in the way of interest. Many of the 5-year period certain options were giving the clients their money back over that period and a ridiculously small amount of interest. Now that rates are increasing this year, the SPIA’s are once again a practical option for part of a person’s retirement strategy. With the SPIA, the client can accomplish one of their primary goals at retirement which is income replacement.

People are accustomed to receiving a paycheck on a regular basis and with the SPIA, they can rest assured that check will arrive every month. It won’t matter what the market is doing or their other investments. This is typically a key cornerstone of a retirement plan. Once the replacement income has been taken care of, an investor can take on more volatility and be invested in the market if they choose. They won’t need to liquidate money out of their equities as the market is dropping to provide income. SPIA’s may not be very sexy to the average investor but they can be an excellent choice when looking at ways to create income. They are about the only the only game in town if a person wants to guarantee a payment for as long as they live if you choose a lifetime payout option. For Non-Qualified SPIA’s, there can also be good tax benefits on the payouts.

What’s The Right Mix?

There is no special formula that works for every client. The key to helping clients reach their retirement goals is to have a good fact finder to start with. Each client will have different goals and concerns and each will have different amounts and types of assets to work with. The more information your clients can provide, the easier your job will be.

The answers will become clear once you decide the amount of income your client needs, the age at which they retire, their overall health and what goals they have for estate planning. Once you have explained your recommendations and put the plan in place, then it’s a matter of reviewing this on a regular basis. Your planning should be an on-going process as your client’s goals and concerns may change as they continue their retirement journey. In an environment where there is constant change, going over your plan and staying in touch is critical.

One change that appears to be on the horizon is regarding social security benefits. For years we have heard that Social Security is going to run out of money. The Social Security Act was signed by FDR in 1935 and has had numerous changes over the last 80 plus years. In recent years, there have been discussions about changing several key parts of Social Security. These talks have included things like increasing the full retirement age again, decreasing monthly benefits and even making it a means-based benefit. With these benefits providing many retirees a primary source of their income, should some or all of these and other changes take place, your planning may need to change as well.

Retirement planning is not a one-and-done deal. Not only will doing regular updates help solidify your relationship with your clients, it also will help you receive more referrals. If a planner is in regular contact with his/her client base, there will be plenty of referrals to follow. Most people work with a planner because they feel that specific planner does a good job of listening and acting on what is most important to them. Take care of your clients and they will take care of you!!

 

Leave a Reply

Your email address will not be published.