Overview
The prolonged low-interest rate environment has created results in traditional fixed income instruments that most clients do not find attractive. Historical approaches to achieving a good return on “safe” money are very difficult these days. Many clients and advisors have resorted to thinking that if you just hang on long enough, the ship will be “righted” and all will be back to normal. Some clients don’t have enough time for markets to “normalize”! Others have bought into a fantasy that somehow they can achieve all of their financial goals of asset growth and guaranteed income with just one “magic” product. While most believe that the last 5 years represent one of the most unique time frames in American financial market history, what has stayed the same is the fact that clients still need answers to basic questions like, “what is the best way for me to achieve sufficient growth on my assets without getting too aggressive and be able to retire comfortably?” or “what is the most efficient way to provide me the necessary income I need without having it subjected to the risk of my income going away?” We don’t believe there are simple answers to any of the previous issues presented, but we do believe that in order to present clients with viable options, we need to vet out all possible options to consider, including annuities.
Our Viewpoint
There is nothing new under the sun… Annuities have been around for a long, long time. They offer unique characteristics, such as opportunity to provide a lifetime income stream or favorable tax treatment by deferring taxes on any growth during an accumulation period. While these are interesting, we don’t believe these represent the best reasons we work with these products. We view annuities through the prism of “risk transfer” for our clients. If we can transfer an identified client risk for a fair return, we consider that to be a good trade. We are planners first and foremost and when clients identify for us their primary goals and objectives, we can then help them assess whether or not the unique risk transfer features of a “Single Purpose” annuity work in their favor. If a client identifies income as their primary goal, additional questions need to be asked to determine how much of a portfolio needs to be in fixed income or “safe” investments to be able to achieve the desired income. Immediate annuities can allow for a much smaller amount of the portfolio to be subjected to the historically low interests rates by transferring the risk of outliving the income stream AND risk of volatile rate swings to a respective high quality insurance company…a fair trade. Alternatively, if clients prefer growth, further development of the risk tolerance would help determine if deferred annuities that provide guaranteed principle with guaranteed growth are viable options. Unfortunately, we repeatedly see clients who were sold on the idea that they could get ONE annuity product to successfully accomplish the dual objectives of guaranteed income with market-oriented growth. As expected, we have seen that that approach doesn’t turn out well for the client. We have found that “single purpose” annuities do a much better job when a client has a need for either guaranteed income or growth of “safe” money. Let us help you by either analyzing your existing annuity(s) or helping you find out if these instruments can help your portfolio.
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