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Where Annuities Fit In The Puzzle
Where and how should annuities figure in retirement-income planning ?
By Ben Mattlin
ANNUITY PROVIDERS WILL TELL YOU their products are the only way to guarantee lifetime retirement income , outside of Social Security and a defined benefit pension . While that may be true , the promises and potential are frequently misrepresented or misunderstood . Advisors need a realistic grasp of exactly how and where annuities can best fit in a comprehensive retirement plan .
Ensuring Basic Needs
“ Income annuities are a great choice for ensuring that basic needs — housing , food , utilities , etc .— are covered ,” says Elle Switzer , director of annuity product management at CUNA Mutual Group in Madison , Wis .
They can , she says , safeguard retirees against running out of money . Unless , of course , the retiree ends up needing far more than anticipated .
“ The spending-needs calculation can be very challenging , and the temptation has been to rely on rules of thumb … which aren ’ t optimal for specific individuals ,” says Matthew Drinkwater , corporate vice president of annuity and retirement income research at LIMRA and LOMA , the industry data trackers in Windsor , Conn .
Advisors , he says , should try to understand each client ’ s spending patterns and account for likely variations . “ If an annuity can keep the roof over the head and food on the table , then maybe the remaining portfolio can cover the luxury hotel stays and fine dining ,” says Drinkwater .
A Puzzle With Many Pieces To that end , many advisors suggest comparing a client ’ s nondiscretionary living expenses against his or her total retirement income from Social Security , pensions and required minimum distributions ( RMDs ) from retirement accounts . “ If there is still a gap ,” says Ari Fischman , a financial life advisor at Telemus in Southfield , Mich ., “ using an income annuity would [ make up the difference ] faster than other assets .”
But another perspective is to consider a bucketing strategy . Adam Handler , vice president of product management at SPS Family in New York City , suggests dividing assets into short- , medium- and long-term goals . “ Income-based annuity solutions may fit this final bucket ,” he says , “ where there is no concern for liquidity , allowing the assets to serve the purpose of generating a consistent and guaranteed income stream .”
During the decumulation phase of life , as the retirement years are sometimes called , investors are no longer looking for long-term growth . “ Annuities are not designed to have the highest returns or be the most robust investments ,” says Tim Rembowski , vice president of member success at DPL Financial Partners in Louisville , Ky . “ They are designed to provide
JUNE 2023 | FINANCIAL ADVISOR MAGAZINE | 45