Lau referred to research showing that those who have secured their essential retirement income were better able to remain calm during the 30% market selloff in March 2020, early in the Covid-19 pandemic. They knew they were in less danger from the market collapse. Those who were depending on equity markets for their essential spending, on the other hand, were more likely to panic and had a harder time staying the course.
Montemurro said that when he explains to clients the difference between essential and discretionary retirement spending, many seem to understand. Discretionary spending can be used for charitable giving or legacy planning, say, but essential spending is for maintaining a lifestyle. "It's for keeping the lights on," he said with a chuckle.
Annuities For Accumulation
Blanchett and Lau discussed how annuities can also be used for asset accumulation. Multiyear guaranteed annuities, for instance, today may pay about 2.5%, Lau said, which makes them effectively as safe as a bond or bank CD, but they have a much better yield and offer tax deferral.
Variable annuities, which invest in mutual-fund-like subaccounts, may come with higher fees than identical mutual funds held outside the vehicles. But within the annuity rapper, taxes are deferred until withdrawals are taken. If you find a no-load or low-load annuity, the fees are reasonable, and the tax deferral can make it a better investment than a mutual fund purchased in the open market.
Lau stressed that a key reason annuities have become a better bargain in recent years is that many of them are now sold commission-free. That means the sales rep works for a fee only and is not compensated for selling a product the client might not need. This, in turn, has brought down annuities’ costs.
Fixed-Income Billing
Lau asked whether advisors charge clients the same fee when managing equity and fixed-income portfolios. Some charge more for equity portfolios than fixed-income portfolios. But according to a survey of participants, most don't differentiate that way. They bill for assets under management, no matter where or how those assets are invested. Blanchett added that this makes sense, since the advisor does the same amount of work either way.
Letting clients know about the advantages of annuities shouldn't cost advisors anything. Nevertheless, many still recommend a total return portfolio that depends on 4% annual withdrawals to generate retirement income, Lau said. This leaves clients open to anxiety over market fluctuations—something annuities can help resolve.