Anna Pfaehler, a financial planner with Palisades Hudson Financial in Scarsdale, N.Y., is one of those advisors who prefers an old-fashioned investment approach to post-retirement investing. She simply diversifies investment portfolios by asset classes into stocks, bonds and exchange-traded funds, according to each client's age and risk tolerance. She uses dividends and capital gains to meet income needs, and required minimum distributions are taken from retirement plans.
Pfaehler says her properly diversified portfolios, along with strong cash positions for clients' emergencies, has limited their longevity risk. Her biggest concern about immediate annuities is that the policyholders run the risk that an insurance company could fail. Then they would be subject to the payout limits and state insurance guaranty associations.
"Immediate annuity income does not keep pace with inflation," she says. "Even a cost-of-living adjustment may not be sufficient."
She also doesn't use variable annuities because of the high cost of the subaccount funds and the other fees. "Variable annuities have layer upon layer of fees," she says. "We told [a new client] to get rid of a variable annuity that was past its surrender period because it charges almost 3% annually."
Other financial advisors, however, believe that the charges and fees are worth the insurance coverage. Barbara Walker Green, the president of Advance Wealth and Retirement Planning Concepts in Houston, makes good use of annuities with riders that provide for lifetime income and long-term-care coverage.
She often uses split-funded annuities. In these vehicles, an immediate annuity pays a current income stream for a specific term during the early years of a policyholder's retirement. The deferred annuity could then possibly offer a higher future income stream.
"In retirement, most people rely on a combination of Social Security, retirement plans and personal savings income," Green says. "A split annuity strategy can help supplement these income sources and add stability."