RETIREMENT
holder reaches age 85 . Up to $ 200,000 per person can be converted from a retirement plan or IRA into a QLAC , either all at once or over time ( these contracts have the option of naming a spouse as a joint annuitant , raising the total investment limit to $ 400,000 ). Since they ’ re deferred annuities , the guaranteed monthly income stream must start at a future date .
This solution greatly improved the client ’ s RMD calculation , “ as well as helped him take some assets off the roller coaster of the market ,” Salierno says .
Guarantees Allow More Aggressive Investing
Scott Stolz at iCapital in St . Petersburg , Fla ., has a longtime client who purchased a variable annuity back in the 1990s , when the yield on 10-year Treasurys was about 8.5 % and the insurance companies assumed clients would have shorter lifespans , and these factors led to an increased payout rate for the annuity . Consequently , for most of the time that the client had owned it , the income it generated was higher than any other annuity he could buy in later years — especially when interest rates were near 0 %.
In addition , the underlying account value ’ s compounded and tax-deferred growth over the decades produced an average annual return of roughly 10.25 %, Stolz says .
He says the client asked to review how his old annuity compared to the new ones today to assess options currently available in the rising interest rate environment . But it was never worth changing the old annuity , however , until about three months ago . The client asked again to review the annuity situation , and Stolz found a new annuity with an income rider that would actually increase the client ’ s guaranteed income by roughly 20 % ( because of the new terms , fee schedule , etc .).
As interest rates have moved up , “ several insurance companies began to offer very competitive income options on their fixed-indexed annuities ,” Stolz says . Fixedindexed annuities ( FIAs ) provide a fixed rate of income , with account values that are linked to a market index . They offer downside protection on the account value in exchange for limiting upside potential .
The guaranteed income from the FIA allowed the client and his wife to “ leave their remaining retirement assets relatively aggressively invested ,” Stolz says .
But that ’ s not the end of the story . The client did not move all of the money from the old annuity to the new one . He kept $ 75,000 in the 30-year-old variable annuity .
“ Variable annuitization is a two-way street . Income payments will decrease if there are insufficient returns on the investment account .”
— Scott Stolz , iCapital
“ One potential long-term problem with the new policy was that the income doesn ’ t increase over time ,” says Stolz . “ Therefore , the income will be slowly eroded by inflation .” The old variable annuity , on the other hand , offers the option of getting a variable annuitization , which differs from a fixed annuitization in that , if the account value rises with the market , the annuitization amount increases , too . “ Of course , variable annuitization is a two-way street ,” Stolz acknowledges . “ Income payments will decrease if there are insufficient returns on the investment account .”
Inheritability
Last year , a woman with a terminal illness approached Danielle Darling , an LPL Financial advisor at Resource One Advisors in St . Albans , Mo . The woman was worried about leaving her loved ones financially secure , especially since she could no longer qualify for life insurance . “ We explored annuities as a tool to help her achieve her goal of leaving a lasting legacy ,” Darling recalls .
The client had worked hard to build wealth , says Darling , and was concerned about not just her children ’ s future but also protecting her wealth no matter how the markets performed . So Darling suggested a variable annuity with an en- hanced death benefit . It would “ not only guarantee her family a substantial payout but also provide the potential for some market-linked growth during her remaining life ,” Darling says .
This solution helped reduce the client ’ s anxiety about leaving her loved ones without financial support . Even if she passed away during a market downturn , her family would still receive the guaranteed benefit amount , which was much more than what her investments alone could have yielded at that point , Darling says .
“ By choosing an annuity , she could focus on spending her final days with her loved ones , knowing she had secured their financial future .” Darling adds that the experience demonstrates the unique ability of annuities to offer asset protection , growth potential and wealth transfer capabilities even when “ life and market circumstances may otherwise pose a challenge .”
Asset Protection
Asset protection is another key benefit that many annuity supporters point to . For example , when Anthony Williams , an LPL Financial advisor and co-founder of Galene Financial in Houston , had a client pass away with very little of his retirement portfolio left , an annuity provided a nice surprise for the client ’ s widow .
“ He was withdrawing over 10 % annually just to keep afloat ,” Williams says . “ One by one , his investments were drained .”
Naturally , the client ’ s widow expected a terrible inheritance . She had seen her late husband ’ s savings pounded by market volatility and excessive withdrawals . But it turned out that , years earlier , the client had purchased a $ 50,000 variable annuity with a living income benefit . The widow was entitled to 100 % of the original $ 50,000 investment .
“ That was when I had my aha moment !” says Williams . “ If more of [ the husband ’ s ] retirement savings had been in that annuity or something similar , he could ’ ve avoided much of the market risk [ and ] might have enjoyed a guaranteed income he couldn ’ t outlive , potentially leaving a much larger legacy for his wife .”
48 | FINANCIAL ADVISOR MAGAZINE | NOVEMBER 2024 WWW . FA-MAG . COM