June is National Annuity Awareness Month, designated in 2010 to help consumers better understand annuities by the National Association for Fixed Annuities (NAFA). Since its introduction, coalition members and National Annuity Awareness Month sponsors have provided communications tools to help financial services professionals educate the public and elected officials about the role they can play for consumers planning for retirement and establishing a lifetime income.
In 2015, CAA launched annuretirement.com, to provide a central location to find these resources and provide accurate information about annuity features and benefits.
Many consumers are unfamiliar with annuities, and how to incorporate them into their retirement plans. Therefore, you should prepare a basic explanation of this financial instrument. You want to educate them and start a discussion on the topic – especially if it hasn’t come up before now.
What is an Annuity?
Your clients may not realize an annuity is a contract between a person and an insurance company. However, they are not like insurance policies. An insurance policy pays the designated beneficiary after the death of the insured person, while an annuity pays the contracted party during their lifetime.
As Investopedia explains, the individual purchasing an annuity either makes a lump-sum payment or a schedule of payments. In return, they receive regular disbursements for a set length of time, or as long as they live. Some begin paying right away, while deferred annuities disburse funds at a future date. All payouts are taxable at regular tax rates.
How Does an Annuity Work?
How much money an it disburses each month depends on if it is fixed or variable. With a fixed annuity, funds accumulate tax-free. There’s a set interest rate and a specified amount the holder of the contract agrees to contribute.
Meanwhile, a variable annuity also allows capital to accumulate shielded from taxation. It also offers a guaranteed interest rate and minimum payout in the contract. A fixed annuity generates a better rate of return, because unlike a variable, it is not invested in bonds and equities.
As with any investment, there are some drawbacks with annuities. Insurance companies issuing the contracts do not protect these financial instruments. What’s more, there are annual fees associated with them.
Growing in Popularity
Over 10,000 people turn 65 each day in the U.S., and people are living longer than ever. More and more pre-retirees and retirees are turning to annuities to supplement their income when they leave the workforce. As CNN Money notes, there is no limit to the size of contributions a person can make to an annuity account.
Some older Americans rely on Social Security alone, or a combination of Social Security and a company pension. But the number of corporations offering pensions to retirees has dwindled significantly over the years. Many employers now offer 401 (k) retirement plans, which put the burden of saving on the employee.
Some people are trying to establish a retirement fund because they don’t have one at all. Others have scrimped and saved and want to feather their nest eggs even further. In both instances, an annuity can help them accumulate savings to live on when they stop working.
There are some compelling reasons to broach the topic of annuities with your clients who are in or nearing retirement.
According to the Social Security Administration, as of December 2019, 45% of unmarried persons and 21% of married couples relied on Social Security for 90% or more of their income. The average monthly benefit paid to a retired worker was $1,503.
For many people, depending on lifestyle choices, that might not be enough to meet expenses, much less allow for extras such as dining out or travel.
So, during National Annuity Awareness Month and throughout the year, you should sit down with these clients to discuss their needs and wants. For some, annuities are an option that could help provide them with a steady source of income during their retirement years.
Click here to learn more about how you can help older Americans with their financial matters.