Lifetime income, protection, stability and preserving a client’s standard of living can help retirees better understand when an annuity is appropriate.
Avantis Investors provides four takeaways advisors can apply in client conversations when discussing annuities with clients.
1. Start with income, not account balances
Advisers should begin with the end in mind. The question is not whether retirement is about having a lump sum of money at 65, but whether clients can maintain their standard of living for as long as they live. If the conversation starts with the portfolio, clients are immediately in an investment frame of mind, thinking about risks, returns, trade-offs and account balances. Starting with income instead shifts the focus to the amount retirees need each month to fund their lifestyle.
2. Position annuities as a tool in the toolkit
Annuities are not a one-size-fits-all solution. Advisers still need to assess a client’s willingness and ability to take risk, time horizon, income needs and later-life goals. For some clients, model portfolios, estate planning and tax strategies will be the priority. For others, an annuity can help bridge the gap between Social Security or pension income and the amount needed to maintain their standard of living. The key is ensuring the solution fits the client’s circumstances.
3. Explain the trade-off between upside and protection
Clients naturally want the full upside of investing without the downside risk. Some annuity products can provide participation in market gains while also offering a level of protection against losses. Advisers should clearly explain that while clients may not receive all of the market’s upside, the trade-off is reduced downside risk. Framing annuities as an insurance solution can make this easier to understand. Just as people do not regret paying for home insurance when their house does not burn down, annuities should be viewed as protection rather than judged solely on whether markets performed strongly.
4. Help clients picture their future self
When clients are 60 or 65, they are planning for a version of themselves at 85, 90 or even 95—a future that can be difficult to imagine. A retirement plan that delivers a regular monthly income can be much easier to manage in later life. This is one of the often-overlooked benefits of lifetime income: it provides financial security for the client’s future self and helps reduce concerns about maintaining their standard of living.
Annuities are best understood as filling the gap between guaranteed income and essential living expenses. Advisers who frame annuities around lifetime income, protection, stability and preserving a client’s standard of living can help retirees better understand when an annuity is appropriate—and when it is not.
