When do most advisors start talking with clients about income annuities? Quick, grab a pencil and jot your answer. Then read on.
Executives from CANNEX USA say the prime time for today’s advisors to have “the talk” is when clients reach their late 60s or early 70s.
This is not accidental, according to CANNEX President Gary Baker. When people turn age 70.5, they must, under U.S. law, start taking required minimum distributions (RMDs) from 401(k)s and other deferred compensation retirement plans they may hold. That drives consumers to their financial advisors for help with the RMD calculation, and that in turn drives advisors to ask their clients about other income sources.
Pretty soon, advisors start hitting up the payout annuity database at CANNEX to find out about income annuity products and features available to meet the customer’s need.
A new report on advisor activity on the CANNEX database shows that the average age of potential income annuity buyers, as inputted by advisors in 2012, was the pre-RMD age of 69.1. (For women, the average was 70.5, and for men, 68.1.)
Trends and trolling
Baker believes that the 69.1 average age is significant. The late 60s and early 70s represent the time of life when many people start intentional income planning, he points out. What happens is that the RMD gets people to sit down with their financial advisor, to find out how much they must withdraw under government rules.
“Clients put their papers on the table, the advisor answers the RMD questions, and then the advisor starts checking to be sure the clients have a sufficient floor on income to supplement other retirement income they may have.”
That’s when the income annuity discussion comes up, he says.
This is a time in life when people move from savings to cash flow, Baker adds. But in many cases, “that’s like going from math to calculus”—because many variables are involved, including time segmentation of the income flows, age of the client, contracts that are available, and options for the consumer.
Even so, “in most cases, at age 70, clients are willing to lock in some income,” Baker says.
The CANNEX report supports that contention. In 2012, 90 percent of the advisor requests were for products making monthly payouts that start immediately. Just a fraction—0.21percent—involved products that would start income up to 300 days later.
It’s about non-qualified funds
The report also shows that nearly 77 percent of the advisor’s payout annuity requests named non-qualified funds as the source for the income annuity funding. By comparison, only 21 percent of the requests named qualified individual retirement accounts as the source.
So, even if RMD rules did drive a lot of clients to visit advisors in the first place, advisors did not limit their discussions with clients to qualified plan issues, says Barker. “They looked at the client’s other savings and explored using non-qualified funds to lock in basic retirement income.”
Only the more sophisticated financial advisors tend to use qualified funds in income annuities, notes Jim Dobler, national sales manager for CANNEX USA.
Such advisors might set up a policy to, say, take care of the RMD withdrawals. But the tax penalty for inadequate RMDs is very steep, he cautions, so it’s important to be very sure that an income annuity payout would cover the RMD now and in the future. If tax provisions involving RMDs should increase, older products would likely be grandfathered, Dobler allows. However, in dire circumstances, “all bets would be off.” For that reason, he says, “it would take a sophisticated financial representative to do it right.”