Resetting For Retirement With Annuity Strategies

January 09, 2013

Resetting For Retirement With Annuity Strategies


Part 1 of 3

By Bill Martina


In today’s financial environment, income planning is paramount. The insurance and financial services industry has seen a significant shift in client priorities. The primary focus is no longer on accumulating assets; it’s on protecting them and leveraging them for lifetime income. That’s a compelling case for continuing to seek opportunities to match well-structured annuity products to identified client needs —and further, to consider a “laddering” strategy utilizing multiple types of annuities to provide a solid combination of features and benefits for certain clients.

In this first installment of a three-part series, we’ll take a closer look at recent research as it relates to the current mindset in the market. We’ll also discuss annuity laddering as a potentially attractive solution for some clients’ needs.

Clearly, needs are evolving. A study published in December by AIG Life and Retirement in collaboration with Age Wave underscores the fact that Americans 55 and older, many of whom have witnessed their retirements stung by financial crisis, are modifying their investing strategies along with their work/leisure expectations and their lifestyle plans. A resounding 80% of the survey respondents reported that their approach to investing is more cautious. They are more likely to pursue financial peace of mind as a key goal than to seek higher, yet riskier, returns.

In fact, in the 2012 AIG Retirement Re-set Study (, a nationwide survey conducted online by Harris Interactive, found that among 3,426 respondents aged 55 or older, more than four times as many people designated saving enough to have “financial peace of mind” (61%) as a top financial priority compared to accumulating as much wealth as possible (14%).

In response to the recent economic and financial market instability, eight times as many respondents (32%) intend to explore ways to guard their existing assets than to invest more aggressively to try to compensate for lost time (4%). And 54% said they wanted an investment strategy that provides guaranteed rising income during retirement. There is no question that many Americans are seeking stable, lower-risk strategies that can bring the income and security necessary in retirement, but they don’t necessarily know what products or paths to choose. And that’s why they find value in professional financial advice.

As we know, however, annuities have long served key roles in retirement planning. And recent LIMRA research showed that two of the top three uses for annuity products in retirement planning are to supplement Social Security and provide guaranteed lifetime income.

There’s no shortage of potential clients who need this kind of support. Approximately 10,000 Baby Boomers turn 65 every day — and rollovers as well as wealth transfers from parents make this special life milestone an opportune time for brokers and advisors to match needs with annuities.

Specifically, this is an ideal time to help clients who have accumulated wealth — and want to put that money to work — to better understand how a laddering strategy with annuities can provide a win-win-win solution as a modest component of an overall balanced portfolio. Clients probably are unaware that a three-pronged laddering strategy can provide asset protection, guaranteed lifetime income, and periodic “pay raises.” As clients age, this strategy should provide the peace of mind they will need as they experience potential inflation costs as well as unforeseen expenses that may occur as clients outlive their projected life expectancies.

For readers who are not very familiar with annuity laddering, let’s consider three types of annuity products that could be purchased simultaneously at age 65 on behalf of a male client who has $200,000 to allocate to a laddering strategy. A majority of the funds, perhaps 60% (in this case, $120,000), could be used to purchase a single premium immediate annuity (SPIA) to generate a guaranteed monthly income for life in the amount of $614.27 based on the client’s projected life expectancy.

Second, 30% ($60,000) of the client’s $200,000 allocation could be utilized to buy a deferred index annuity with a living benefit rider, which could be targeted to trigger income when he reaches age 77. Hypothetically, he has already been receiving income of $614.27 per month, based on his projected life expectancy, from the SPIA he purchased at age 65. At age 77, he would initiate living benefit payments on the $60,000 index annuity and receive an increase in lifetime income of $553.33 per month which also can be managed to increase each year thereafter.

Finally, when he reaches age 85 (assuming that was his projected life expectancy), he could receive an additional income stream of $400 per month for 10 years by triggering a delayed income annuity (DIA) that he had purchased for 10% ($20,000) of his $200,000 allocation for the laddering strategy. That’s substantial “money back,” both interest and principal, which can come in handy given the expenses that many clients face as they age, such as home health care, assisted living facility or higher medical costs.

Therefore, as he steps through his years, from age 65 to age 77, this hypothetical client has the SPIA providing monthly income that can be guaranteed for life; at age 77, the living benefit rider kicks in from the index annuity to provide a pay raise; and then at age 85, the delayed income annuity triggers additional income. Over the long run, that’s money for now, money for the future, and money for the time beyond which the client is expected to live.1

While this type of annuity laddering strategy merits strong consideration for certain clients, other strategies lend themselves to other clients. Over the coming months, in parts 2 and 3 of this article series, we will discuss the features and benefits of delayed income annuities in more detail, and explore another “split” annuity strategy. Stay tuned.

1 Bear in mind that with the SPIA and the DIA, your client will permanently convert principal to a guaranteed income stream beginning within a year (for the SPIA) or at a future pre-determined date (for the DIA).The choice of income plan – whether payments for life, a certain number of years or a combination of the two and whether payments are made on a single life or joint lives – also is made at the time of purchase. SPIAs and DIAs have no cash value or accumulation period with guaranteed interest; there are no surrenders or withdrawals. With the DIA, the client must survive in order for payments to be made. Death benefit options are available, however, for clients who wish to ensure that their principal will be passed on to their heirs should they die during the delay period. With the index annuity, living benefit riders usually entail a fee, either upfront or if and when benefits are taken. Withdrawing more than the living benefit amount or starting benefits prematurely can reduce the amount of guaranteed payments or limit annual increases on those payments.


Bill Martina is Divisional Vice President with American General Life Companies.

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