Implementing Peace of Mind in Your Client's Retirement

Diversification is essential to optimizing performance. When you strategically position annuities, you could free the remaining assets, which allows for a more aggressive investment, and the retirement your clients deserve.”

In the past, annuities were seen as a polarizing and controversial financial product, yet there has been a shift in how they are perceived. In contrast with advocates touting annuities’ tax advantages and the ability to hedge against longevity risk through lifetime income, opponents argue that annuities’ high fees and illiquidity far outweigh any benefits.

This differing of views raises the question — what is the value of annuities?

The Center of Retirement Research at Boston College previously conducted a study to answer this exact question. To quantify an annuity’s value, two metrics were used: money’s worth and wealth equivalence. This study defines money’s worth as the ratio of the expected present value of its payouts to its premium.” In other words, the breakeven point of the annuity investment occurs when the annuitant receives income payments equal to the total present value of the premiums paid. 

On the other hand, wealth equivalence focuses on the insurance component of the annuity, comparing annuitization with the amount of wealth an individual would need to have without annuitization to be just as successful (i.e., not outliving one’s assets) in retirement. 

The results revealed that annuities generally return 50 – 80 cents for every dollar invested when considering the money’s worth value. However, the study also confirmed that the wealth equivalent value of annuities is greater as they uniquely offset the risk of longevity in a way that cannot be duplicated in other financial instruments. 

Peace of Mind is Priceless

One dynamic the study neglected to consider is the invaluable peace of mind” component that guaranteed income provides retiring individuals. Many Americans receive steady paychecks every two weeks for more than 40 working years. This reliable income helps budget for living expenses, save for the future, and spend on leisure items or experiences. So it makes sense why a sudden shift from receiving a biweekly paycheck to manually withdrawing from a large pool of retirement savings would be psychologically jarring. 

This method lacks a level of certainty and consistency that many individuals have depended upon for decades. In today’s world of disappearing pensions and uncertainty around Social Security, it is no surprise that the most significant fear of retirees is outliving their money. 

Can the peace of mind component of annuities be proven? In a white paper, Towers Watson analyzed a University of Michigan study that surveyed 26,000 individuals over the age of 50 to determine what factors lead to satisfaction in retirement. Across all demographics, their results presented the leading cause of sustained retirement satisfaction as receiving guaranteed annuitized income from a portion of total assets. Those retirees with the greatest percentage of annuitized income claimed the highest levels of satisfaction. However, interestingly enough, the level of satisfaction was unrelated to the investment performance of the annuity itself. 

Similar to other forms of insurance, annuities can provide much greater psychological value than pure investment value. To illustrate this point — a homeowner may pay a lifetime of premiums for home insurance and never need to file a claim. Yet, because that homeowner witnessed his neighbor’s house destroyed in a fire, the peace of mind value that home insurance provides far exceeds that of its money’s worth value. 

Another critical factor overlooked in the Center of Retirement Research study is that annuities should rarely — if ever — comprise an individual’s entire portfolio. As a result, your client’s annuity value should not be assessed in a vacuum. Diversification is essential to optimizing performance. When you strategically position annuities to generate guaranteed income from a portion of the overall portfolio, this frees the remaining assets and allows for a more aggressive investment. 

Implementing Annuities in Your Client Strategy

With an annuity hedging against sequence of returns and interest rate risks, the total portfolio no longer bears the sole responsibility of sustaining income through unknown market scenarios over an unknown life expectancy. 

This annuity implementation strategy, known as Income Alpha, has the potential to increase lifetime income by more than 15% and improve the probability of success** by more than 25%. Furthermore, Income Alpha lays the groundwork to sustain and potentially increase assets under management (AUM) over time, thus enhancing the legacy to beneficiaries — in many cases — by more than 300%.

You can reach out to the Palladium Group team to see Income Alpha in action or to review additional solutions that may be available to help ease your clients’ retirement concerns, as each scenario is different and needs to be specifically evaluated. An RIA Consultant would be happy to evaluate specific client scenarios with you to determine whether a particular strategy could improve outcomes without sacrificing AUM — safeguarding the financial future you and your clients have built together. 

*This material is for financial professional and educational use only. Not to be reproduced or shown to clients.

**Probability of success is determined by the probability of having at least $1 left in the portfolio upon death, tested through 5,000 Monte Carlo market simulations.