IMMEDIATE ANNUITIES IN
RETIREMENT-INCOME PLANNING:BALANCING CASH FLOW AND LIQUIDITY
Michael H. Korthaus

Mike Korthaus is Vice PResident of Financial Institution Sales, Protective Life Insurance Company, Birmingham, Alabama. He can be reached at (513) 362-1553 or via email at mike.kortaus@protective.com
 
 
 

DO YOUR CLIENTS plan to withdraw from their nest eggs to supplement retirement income? This strategy may be fine for some, but many simply don't have enough liquid assets to make it work and therefore face a real risk of outliving their money in retirement.

When you next discuss retirement with your clients, ask this question: "What's more important for you during retirement—cash or cash flow?" You might hear from many that guaranteeing cash flow (a steady stream of predictable income) is much more important than managing a pile of cash.

Where do they look for this critical, guaranteed, retirement cash flow? The main source is still Social Security. Despite well-publicized concerns about its long-term viability, this system still delivers reliable income for millions of retired Americans. These retirees enjoy the security of receiving a monthly check for the rest of their lives—and with potential cost-of-living increases along the way.

But a big downside to Social Security is that benefits are limited. Simply put, your clients can't ‘buy' a bigger monthly Social Security benefit. But they can consider another product that has many of the same characteristics: a single premium immediate annuity (SPIA).

Consider a SPIA if your clients need a product that:

• Offers guarantees from the issuing insurance company.
• Delivers lifetime income and a variety of payment options.
• May provide automatic payment increases each year to counter inflation.
• Offers enhanced survivorship options, including payments that aren't reduced when the first spouse dies.

A delicate balance

SPIAs can be very efficient and may produce a higher level of guaranteed cash flow than other investment alternatives. Therefore, logic might dictate that your clients' retirement cash flow should come exclusively from SPIAs. But we know better; prudent concerns about diversification and liquidity lead us to other solutions.

According to a recent LIMRA International survey, retirees' comfort with annuitization is higher than you may have guessed. Over 70% of retirees would consider converting 20% or more of savings into an income stream.

So what is the right balance? That will vary greatly from client to client. But a rule of thumb says that your clients will need assets equal to about 25 times their desired annual cash flow. So if they're looking for $4,000 of annual lifetime income from their portfolio, they will need an asset pool of about $100,000 when they begin taking withdrawals. In this example, if your clients have significantly more than $100,000 set aside for cash flow, they might consider keeping a larger proportion in other investments. But if their assets fall short of that level, they might prefer to direct a higher percentage of funds to an immediate annuity purchase to optimize the level of guaranteed retirement cash flow.

Next steps

Immediate annuities can be a powerful solution, particularly when combined with the other tools that are available to help your clients manage long-term planning objectives. Consider partnering with an insurance carrier that has a wide array of tools to help you engage your clients in finding retirement solutions—including life and annuity products, client seminars and brochures, needs-analysis tools, and financial calculators. With the right tools, planning, and collaboration, you can help add tremendous value and security to your clients' retirement years.