The Misconception Of Annuity Liquidity And Income Riders

By |2019-08-07T21:16:16+00:00August 7th, 2019|Annuities|

One of the biggest concerns my prospective clients have when researching annuities is accessibility.

 

As big as a myth that this is, the reality is, annuities have more liquidity features than any other considerable “safe” investments. The only investment with more liquidity in a “safe money” investment is cash just sitting in a bank savings account.

As you may well know, most Annuities grant a 10% penalty-free withdrawal per year. Some companies may make you wait a year, while others allow withdrawal in the first year. Many companies offer plans that are more liberal with withdrawals. Some even allow the annuity owner to withdraw 20% penalty-free (under certain conditions).

When I mention the free withdrawal provision that available in most Fixed and Fixed-Indexed annuities my prospective clients may say they may need more than 10% per year in any given event and “don’t want to give up that much control” of their retirement funds. Keep in mind, many of my clients who first explore annuity options have been saving for their retirement for nearly 40 years or more. The one question I always ask my clients before even diving into the particular chassis of an Immediate, Fixed, or Fixed-Indexed Annuity is:

“In your 30-40 years of saving for your retirement, in any given year have you had to access more than 10% of your retirement portfolio?”

More often than not, the general response is “NO.” In addition, as an advisor who has been making annuity recommendations for the last 16 years, if a client needs to access more than 10% of their retirement funds annually on a consistent basis, they haven’t quite been saving enough and generally a conversation regarding possible Annuity options is not a suitable one to have.

In past years, I’ve always been in favor of income riders that provide guaranteed lifetime income (that don’t arrive with expensive fees). When structured appropriately accessing 10% penalty-free withdrawals per year on a non-fee basis can also be very useful.

Let’s be realistic, in the annuity world, and it’s challenging to have your “cake and eat it too.” Initially, you either have to opt for income (usually accomplished with Guaranteed Lifetime Withdrawal Benefits) coupled with lower caps and participation rates OR you could benefit from an annuity that offers more flexible investment strategies. While providing the ability to meet income needs for any client who doesn’t purchase a lifetime income rider, 10% penalty-free withdrawals also can be utilized to fund other investment opportunities.

I’ve always been a huge advocate of shorter-term annuities between 5 to 7 years. ALWAYS. Why so? Let’s look at it this way, any Fixed Indexed Annuity with a Guaranteed Lifetime Income Rider is generally going to offer the client a payout percentage of about 4%-6% if they’re between the ages of 60-75, correct? Wait for Eric, that’s under the free annual withdrawal percentage of 10%!!

I truly shifted my outlook on Income Riders about 5 years ago. I’ve discovered that you can participate in the same level of safety with more accumulation in the earlier years of your retirement then implement that same accumulation to purchase a lifetime income-laden product just a few years into retirement. Opt for the shortest term benefits now and provide yourself with lifetime income when rates are generally higher in the future.

Yes, I’m fully aware that you sacrifice guaranteed lifetime income, but do the numbers on this for a client who has just retired at 60, you’ll be surprised when that same client can utilize the funds accumulated from the ages of 60-67 and purchase a Lifetime Income play. Besides, their lifetime payout percentage will, depending on the carrier, catapult by .5-1%.

This sounds like a broken record or a generic statement, but Annuities are far from a “one size fits all” option. One should never underestimate the power of 10% penalty-free withdrawals, when allocated appropriately amongst flexible indexing options, with a Carrier whose renewal history and offering rates are stellar.

While entering my 17th year of presenting and analyzing annuity options to my clients, I’ve been able to help them maximize this feature, and they’ve never touched their initial principal. Annuity returns in the last decade have been fantastic, and I’ve done my fair share of annual reviews with clients, and many of their actual results have been well over double digits.

I truly grasp the fact that there is a situation where any annuity, whether it be an Immediate, Fixed, or Fixed-Indexed Annuity (w/Lifetime Income Benefits) can meet a specified need.

 

However, if liquidity has been your biggest concern or pull-back before making an annuity decision, hopefully, I have opened your eyes to the fact that often the 10% penalty-free withdrawal provisions will more than suffice.

About the Author:

Eric Coons
With over 16 years of industry experience as both a captive agency manager and an independent annuities broker, Eric manages over 100 million in Fixed and Indexed annuities with clients in Arkansas, Missouri and Oklahoma. Web Sites: EricCoons.RetireVillage.com |www.kaleidoscopeinsurancesolutions.com