Annuities can be powerful tools to use when creating a retirement strategy. While guaranteed lifetime income may be their most talked-about benefit,1 annuities can play a larger role as part of a holistic retirement strategy.
Five strategies show the potential power of annuities: income tax deferral, complementing an investment strategy, seeking to improve retirement outcomes, income tax hedge, and lifetime income.1
An annuity can be used to provide beneficial tax treatment. Nonqualified annuities – using money that has already been taxed – will defer income tax on earnings until the earnings are withdrawn from the contract.2 So, instead of losing a portion of the earnings in taxes every year, the earnings can be retained and exposed to the underlying investments. Through compounding, this can allow money more opportunity to grow before withdrawal.
While investors often rely on equities for growth potential and fixed income for protection, an annuity can help complement their overall financial strategy. A registered index-linked annuity (RILA) is designed to give the contract owner the benefit of sophisticated options that have growth potential and a predetermined level of protection. A RILA can help diversify a strategy by offering a balance of performance potential and a level of protection from market downturns.
While diversification helps mitigate risk, it does not guarantee a profit or protect against a loss.
Adding an annuity to a retirement income strategy can help improve financial planning outcomes. Software, like eMoney, can help demonstrate that incorporating an annuity into a portfolio can increase the probability of success for some clients.
By using a Monte Carlo analysis,3 the software can model a hypothetical scenario for a couple who would like to have $120,000 in income per year after taxes that will last until age 95. In this hypothetical scenario, the couple can increase the probability of achieving their retirement goals from 63% (taking Social Security at age 62 and using a systematic withdrawal plan) to 93% by delaying Social Security until age 70 and adding a registered-index linked annuity with increasing income to their portfolio.
Tax rates will change and may increase for married clients during retirement. For example, often one spouse will outlive the other by years if not decades. The surviving spouse will then file as a single taxpayer, rather than as married filing jointly. The tax increase can be substantial, draining assets and reducing available income.
An annuity can offer another stable, possibly increasing, retirement income source that is not affected by one of the partners passing. An annuity income payment will not be depleted due to a change in tax status and/or the loss of Social Security benefits.
Finally, there’s the benefit that most people associate with annuities – lifetime guaranteed income.1 An income annuity can offer guaranteed income for the length of a person’s life. Some annuities have income benefits that offer opportunities for increasing income, which can help mitigate the effects of inflation and may provide a level of protection against market volatility.
1 Assumes all terms of the contract are followed and no more than the annual maximum income payment is taken.
2 Withdrawals will reduce contract values (including any Cash Value) and the value of any potential protection benefits. Withdrawals taken within the period stated in the prospectus will be subject to a withdrawal charge or a Market Value Adjustment (MVA), depending on the product. All withdrawals are subject to ordinary income tax and, if taken prior to age 59½, may be subject to a 10% federal additional tax.
3 The assumptions we use in this analysis start with the average return of the S&P 500 over the last 70 years (9.20%) with a standard deviation of 16.81%. For this presentation, this will represent a 100% equity portfolio. From there, we will assume that any long-term portfolio will have a return/volatility that falls along the slope from 0/0 to 9.20%/16.81%. In this presentation, we use a long-term investment return of 6.00%/yr with a standard deviation of 10.96%
Registered index-linked annuities (RILAs) provide indexed return potential with the opportunity for varying levels of protection through multiple index options available prior to receiving income, tax-deferred growth potential, a variety of lifetime annuity payout options, and a death benefit during the accumulation phase.
RILAs are subject to investment risk, including possible loss of principal. Investment returns and principal value will fluctuate with market conditions so that contract value, upon distribution, may be worth more or less than the original cost.
Guarantees are backed by the financial strength and claims-paying ability of Allianz Life Insurance Company of North America. Registered index-linked annuity (RILA) guarantees do not apply to the performance of the variable subaccount(s), which will fluctuate with market conditions.
Products are issued by Allianz Life Insurance Company of North America. Registered index-linked annuities (RILAs) are distributed by its affiliate, Allianz Life Financial Services, LLC, member FINRA, 5701 Golden Hills Drive, Minneapolis, MN 55416-1297. 800.542.5427 www.allianzlife.com
This content does not apply in the state of New York.
For investment professional use only – not for use with the public.
