Let's say you have a risk-averse client who is already in retirement or close to it. The client knows it is time to get more serious about saving for the upcoming years but is reluctant to invest in securities-based products. One solution is a fixed annuity that offers a guaranteed rate of return and a guaranteed income stream for life -- without the volatility of market-based investments.
Many clients who use CDs as their primary savings vehicle may be particularly comfortable with a fixed annuity. It is attractive to more conservative investors for a number of reasons:
o The principal is guaranteed.
o Because they are long-term investments, fixed annuities often offer guaranteed interest rates that are higher than other guaranteed-rate investments.
o The guaranteed rate is earned on a tax-deferred basis so earnings accumulate faster than traditional investments. Earnings are compounded not only on the initial investment, but also on funds that would have paid taxes in a traditional investment that does not offer tax deferral. No taxes are paid on earnings until there is a withdrawal.
o Usually the investor can withdraw interest and up to 10 percent of the principal annually.
These are the basic elements of a fixed annuity. Over the years, however, this product has gained features that allow investors to tailor annuities toward their retirement goals while also relieving them of concerns about uncertain market conditions. With fixed annuities, the key selling point is safety and, increasingly, flexibility. Because a fixed annuity is not tied to the stock market, if the market goes down, principal and earnings will not decrease. Here are several newer options that can help your clients get ahead with their retirement savings.
Liquid savings at a guaranteed rate
One of the most innovative features in the industry today allows the investor to keep a set amount of savings readily accessible or liquid -- though still tax-deferred -- in order to take advantage of future interest rate environments.
This is a particularly good choice for an investor who is trying to manage interest rates on a number of traditional fixed interest products and is also paying current taxes. Liquid savings at a guaranteed rate provide similar earnings but with the added benefit of tax-deferral.
This option could be beneficial for a couple interested in investing in a fixed-rate annuity but who also desire flexibility in accessing a portion of their funds, perhaps to help a grandchild with college expenses or to fund a major house repair in the coming years.
Laddered contract
This plan makes great sense in an uncertain rate environment, allowing the investor to choose different terms or just let savings mature. The appeal of the laddered contract is that there are multiple guarantee periods all within the same contract. The investor can put some in at a short-term rate and some for a longer term, a good approach when no one knows if rates are going up or down. By allocating dollars to different guarantee periods, the investor achieves more flexibility to manage the interest rates they earn.
Someone who is in their 60s, healthy, and positive about their financial future may want the security of knowing that their investments will earn a guaranteed rate but that they aren't locked into one guarantee period. They can initially invest in a combination of guarantee periods and then reset these periods upon their maturity.
Accumulated bonus rate
If investors achieve a certain contract size, often in the $100,000 range, through new deposits or interest accumulated, they may qualify for an accumulated bonus rate on all of the contract value. That rate -- often 10 basis points above the rate quoted -- remains in place so long as the account balance does not go below the specified contract size.
This option may be appealing to an investor with $75,000 to invest now and who can invest $15,000 a quarter for the next two years. This investor has incentive to continue investing, knowing there is a reward for diligently increasing the account balance.
Fixed annuities that are tailored so easily to your client's needs serve a dual purpose. With them, your client is on the road to a comfortable, worry- free retirement and you enjoy the satisfaction of matching a conservative-minded investor with a time-tested product that offers tax benefits as well as greater flexibility than other traditional fixed interest rate products.
Greg Garvin is vice president of Security Benefit. He can be reached at greg.garvin@securitybenefit.com.
