How to Help Clients Understand Annuities: Bringing Dependability, Flexibility, and Diversification to Retirement Planning

With market uncertainty dominating the news, financial advisors are facing more client concerns than ever about how to protect their assets in retirement plans and the income they will be expecting. While many clients may be maxing out their 401(k)s or IRAs, that may not be enough to alleviate their concerns and give them peace of mind. This is where annuities can play a pivotal role—and it’s up to you, as their trusted advisor, to educate clients about annuities and make sure they are aware of the main advantages these financial instruments provide. In fact, annuities could serve as a valid alternative or a nice addition to retirement savings.

Back to the core

At its core, an annuity is a retirement vehicle that offers guaranteed income, either for a set period or for life (New York Life). According to Guardian, annuities can complement other retirement savings, preventing clients from putting all their eggs in one basket. And when that one basket could be the equity market …well… By the way, when has relying too heavily on one source of income ever been a good idea? Think of it as one more tool in your “financial toolbox”, especially helpful when building a foundation of life-long income – something your clients will appreciate deeply.

But here is the problem. Oftentimes, annuities are misunderstood or overlooked because they can be very complex. That’s why, a good way to guide client conversations is by focusing on three straightforward concepts they may be able to grasp: dependability, diversification, and flexibility. In fact, in my professional opinion, these are the main benefits of annuities.

Key advantages of annuities every advisor should know

Dependability

Annuities are contracts backed by insurance companies, which means they’re designed to offer stability in uncertain times. According to New York Life, annuities can provide guarantees against the loss of principal and credited interest, making them especially appealing during periods of market volatility. Clients should know that the reliability of annuity payments largely depends on the financial strength of the issuing insurer, be it a bank or the underwriting life insurance company. That’s why it’s so important to pay close attention to a company’s credit rating. Clients are often '’blinded by the rate’’ focusing solely on the payout and the percentage of return. You should also explain to each client that top-rated carriers are regularly evaluated by agencies such as AM Best, Moody’s or S&P, which is similar to analysis and ratings provided for equity and fixed income securities. This is a great way to make an informed decision about whether the monthly or quarterly payments your clients are relying on will be there when they need them along their retirement journey.

Diversification

While “singing praises” to annuities is justified, let’s not forget that they should complement traditional retirement plans, NOT replace them. Many advisors recommend using annuities to cover fixed expenses, while relying on other investments for discretionary spending (Wealthmanagement.com). It’s a no-brainer that this approach may help reduce the emotional stress many retirees feel when drawing from accounts that are tied to market performance.

For example, an annuity that provides a fixed percentage of income for life—whether for your client alone or jointly with a spouse or partner—can serve as a valuable addition to other savings while in retirement. I am talking about contributions to an employer-sponsored plan and Social Security. As you can imagine, this powerful combination and diversified portfolio strategy provides a solid foundation for retirement success. That’s how retirees and their families can lean on annuity payments and Social Security checks to cover their living expenses. Furthermore, they can tap into other savings and investments for discretionary retirement spending.

Here is one real-world scenario you can mention to your clients and help them embrace this concept. Let’s say there is a 64-year-old self-employed consultant who has been saving money diligently in an IRA but lacks predictable income. By placing a portion of her IRA assets into a deferred annuity, she can secure a guaranteed income stream when she begins tapping into her funds, starting at age 66. In this case, there is no need to rely entirely on the market or unpredictable future returns. Smart move, if you ask me!

Flexibility

Contrary to common belief, many annuities offer a degree of flexibility that clients usually do not expect. That’s why they have you, a savvy financial advisor, to remind them about it. For example, through a 1035 Exchange, clients may be able to transfer funds from one annuity to another or switch providers, without triggering taxes, which can be especially helpful in a rising rate environment. Before making a decision, I suggest you review your client’s specific annuity contract and determine whether exchanging the annuity is cost-effective.

Final thoughts:

As with any solution, annuities may not be right for everyone. Your job is to carefully evaluate the client’s time horizon, risk tolerance, income needs, and overall goals. One simple rule of thumb: If a client’s primary concern is outliving their money—not leaving a large estate—then an annuity might be appropriate.

Keep in mind that understanding the “why” is key. Are you helping a client cover core retirement expenses? Address healthcare risks? Leave a legacy? All these nuances are crucial, and clearly identifying your client’s goals may guide the conversation toward the right solution.

Remember one more thing: we at Cannon speak often about the 4L's of Life Planning and Wellness; Lifestyle, Liquidity, Longevity, and Legacy (if possible). When used appropriately, annuities can provide your clients with something that’s often hard to find in today’s investment marketplace-- peace of mind. And when you explain them in plain language, backed by a thoughtful strategy, and a financially sound insurance provider, your clients are more likely to see the value and appreciate your guidance, knowledge and expertise.

With the important issues related to Lifestyle and Longevity hopefully covered, as the late, great singer-songwriter Meatloaf wrote ‘’ two out of three ain't bad!”

guidance, knowledge and expertise.