Annuities in Retirement Income Planning

In this series of interviews, professor Jamie Hopkins and I talk with retirement income expert Curtis Cloke about using income annuities in a retirement income plan. The conversations include a discussion of the role of income annuities in retirement income planning, how Qualified Longevity Annuity Contracts (QLACs) fit into planning, the state of the deferred income annuity marketplace, and understanding the value in purchasing deferred income.

The Case for Income Annuities

In “The Case for Income Annuities in a Retirement Income Plan,” Jamie Hopkins and Curtis Cloke discuss the role of income annuities in a retirement income plan. Curtis generally looks to build plans that combine guaranteed lifetime income with portfolio withdrawals to generate needed income. The lifetime income annuities provide reliable income for life that helps mitigate longevity risk, ensures that the income floor is always available, and can even provide some protection from elder financial fraud. Maybe more important is that the payout rate on the annuity income allows the retiree to generate the needed income with fewer assets, providing more true liquidity with other assets.

In this video, Curtis Cloke makes the case for using income annuities in a retirement income plan. He discusses how he constructs a plan, the role that annuities can play, and the risks that they can address.

The Role of QLACs

In “Using QLACs in Retirement Income Planning,” Curtis Cloke discusses the benefits of using QLACs inside of an IRA account. He sees two key reasons to consider a QLAC. First is the tax benefit of deferring required minimum distributions. The second is that building in an income stream later in life helps to reduce the possibility that portfolio withdrawals will significantly reduce the portfolio. He also has some practical advice about buying QLACs, which includes:

  • Purchase QLACs at an earlier age to generate the most income and to defer more required minimum distributions.
  • Retain flexibility in the start date by choosing a product that allows for changes and select an initial starting age that allows for the most flexibility.
  • Provide peace of mind by selecting a cash refund feature for the possibility of an early death.

In this practical video, Curtis Cloke discusses the reasons for using QLACs as well as choosing the right product design to meet client needs.

The Deferred Income Annuity Marketplace

In “Current State of Deferred Income Annuity Products,” Curtis Cloke discusses the deferred income annuity market today. He reviews the cost of buying income and recent product developments. One of the main points he makes is that we have seen an explosion in the number of deferred income products today, and the products are more flexible today than ever before.

This video discusses the types of returns that are available today based on current interest rates and mortality tables.


The Value of Deferred Income Fixed Term Annuities

In “Illustrating the Financial Advantage of the Deferred Income Annuity,” Curtis Cloke demonstrates why a client may want to lock into a deferred income annuity versus investing for a period of time then annuitizing later. Locking into an income annuity eliminates flexibility and the question is always “is it worth it?” To illustrate, Curtis builds an example assuming that a client wants to generate $2,000 a month of income beginning in 10 years and lasting for 10 years. The cost of the deferred income annuity is $211,826. As an alternative, he takes the $211,826 and purchases a 10-year fixed term deferred annuity earning 3 percent. After 10 years, using current SPIA rates, he purchases a 10-year term certain annuity – and finds that it pays less than $1,500 a month. The example clearly illustrates that it is worth considering the deferred income option!

This video illustrates the financial benefits of a deferred income annuity by comparing a 10-year term certain deferred income annuity that begins payments in 10 years to a 10-year fixed deferred annuity followed by the purchase of a 10-year term certain income annuity.

Delivering Retirement Income Expertise To Clients

Understanding how to effectively leverage QLACs and deferred income annuities is an important part of the advisor's job. Today, the need for retirement income expertise is greater than ever, as consumers’ retirement income literacy remains poor. A recent survey of retirement-aged Americans revealed troubling results; nearly three-quarters of the 1,244 people who took The College's retirement income literacy quiz failed it. The poor quiz performance highlights the need for a well-educated cohort of retirement income advisors to step in and help guide Americans to a secure and sustainable retirement.

Join us on June 21, 2017 for a webcast where we will dive deeper into the takeaways from the literacy study. Register here. 


This blog is part of a series by Professor David Littell, Director of the RICP® program and Co-director of The American College New York Life Center for Retirement Income. Each post in this series features a video or videos from the Center offering valuable retirement income planning tips for advisors and their clients. Many of the experts in these videos are featured in the RICP® program curriculum.