As your clients approach retirement, they have certain funds designated to help supplement their pension and Social Security. They may need these funds to provide income to be constant, reliable and with little or no risk of ceasing. Annuities were designed with these characteristics in mind.

Annuities have a long history. They originated in Roman times. Beethoven’s patrons left him an annuity so he could be free of income worries. Benjamin Franklin loved his birthplace, Boston, so much he left the city an annuity that continued to pay out for 200 years after his death -- until 1991, when the city cashed it in.

In recent years, annuity companies have made some significant improvements to annuities that have eliminated some of the objections some people might have had in the past.

When you “annuitize” a client’s money, you basically turn it into a pension. The clients give the money to the insurance company, which then promises to pay them a set amount each month (or year) until they die. Upon a client’s death, the company keeps any remaining “balance.” Many clients are concerned that their children will “lose out” on a substantial amount of money if they die early. This has prevented many people from taking money they have saved in their IRAs or 401(k)s and turning it into a lifetime income. Instead, they have left it in stocks and bonds and experienced the recent dramatic ups and downs of the markets.

That is why a few years ago, the insurance companies got smart and came up with a “hybrid” annuity. These annuities guarantee a lifetime income, but let you keep what’s left of the account.  You don’t have to “annuitize” the money. In a sense, you can “have your cake and eat it too.” These annuities have income riders that will guarantee clients an income they can’t outlive, but still allow them to leave any remaining balance to their heirs. They set up an annuity with the company, and when they start the income, the company will deduct each payment from the account. If they die early, the kids will get to keep what’s left of the money. If they live a long time and the money in their account runs out, the company will continue to pay the same income. These new hybrid annuities have much more flexibility than a traditional annuitization. Clients can choose when to start payments (each year they delay, the payment typically increases by 6% or more).  If they are receiving more income than needed, they can stop it and later restart the payments. While stopped, the balance in the account will continue to grow. At a later date, they can take what’s left of the money and move it to some other investment if the situation warrants it (subject to surrender fees in the early years).

So if your client wants to guarantee a portion of his or her retirement income but wants more flexibility than a traditional annuitization, consider one of these hybrid annuities. In most cases, the guaranteed payout may exceed 90% of what they would have received had they annuitized. This slight decrease in income may well be worth the increase in flexibility and options.

There are, however, situations where annuities shouldn’t be used. Because annuity companies are making long-term investments and are counting on having the money for several years, they usually charge a penalty if the client cashes out early or takes more than 10% in any given year. They are not good places to put money your client expects to use for a large expenditure like buying a boat or cabin; rather, they are good for money to be used to generate a steady retirement income.

David Shucavage is president of Carolina Estate Planners. Please visit www.carolinaestateplanners.com to learn more.