Ensuring Financial Security
While inheritance may figure into the annuity decision, it’s not typically the primary consideration. “Purchasing an annuity is about ensuring a guaranteed source of income to help provide certainty and cover costs throughout retirement,” says Perlin. “People concerned with leaving assets to their heirs are often also concerned with ensuring their own financial security during their lifetime—which is where annuities come into play.”
Clients concerned specifically about leaving a legacy to heirs will typically focus more on products like life insurance, she says, though an annuity can be an appropriate tool if, say, the client cannot get life insurance because of a pre-existing health condition. Such clients “can use a death benefit on an annuity to provide a legacy for their heirs,” Perlin says.
Effect On One’s Estate
Nevertheless, clients can shrink the size of their estate by funding an annuity. “Buying an annuity to fill an income gap in retirement typically means that person will have less money to leave to heirs,” Stolz says. “There is a cost to providing a guaranteed income for life.”
On the other hand, having that guaranteed income stream also means you’re less likely to become a financial burden on loved ones, and more likely to preserve other assets in your estate. “When it comes to annuities, it’s not an all-or-nothing decision,” says Craig Hawley, head of Nationwide’s annuity distribution unit in Louisville, Ky. Clients who have a guaranteed income, he says, enjoy “the flexibility to invest the rest [of their assets] more aggressively, whether it’s for greater growth, for greater liquidity or to pass along to heirs.”
Part Of A Holistic Plan
To Hawley, it’s important to realize that annuities are—or should be—a piece of an overall financial scheme. “The decision to invest in an annuity needs to be part of a strategic and holistic plan so clients can protect their income in retirement and ensure that they don’t outlive their savings,” he says. “It starts with knowing the client’s needs and priorities—accumulation, generating income [or] leaving a legacy. Second, it’s important to consider how annuities will fit with other sources of income such as Social Security; qualified retirement accounts; and other investments such as stocks, bonds and mutual funds.”
Stolz might agree. “One must separate those buying an annuity for the accumulation of wealth from those buying for an income,” he says.
Many Purposes
To be sure, annuities can fulfill many purposes. Those who have maximized their retirement contributions might set aside additional money in an annuity for tax-deferred accumulation. “Since annuities still carry a 10% additional tax, like IRAs, for withdrawals prior to 59 and a half, this has to be money that clients don’t anticipate needing in the near future,” Stolz says. “Those that buy an annuity to turn into income have typically calculated the amount they will need in retirement and will not receive enough money from Social Security and their pension—if they are lucky enough to have one—to fill the income gap. Essentially, they are creating their own pension.”
Put that way, it becomes clear that an annuity is truly just another type of insurance product. “An annuity is one of the only solutions that can protect a client’s future by providing guaranteed income for life,” Hawley says. “That’s a compelling proposition now that many clients face a retirement that could last 20 to 30 years or more. You insure your home, your car—why not insure your financial future?”