Robert Schneider, CFP®, RICP®

Your Annuity Guide – Part Four: Annuity Strategies

This is the final post in my series, “Your Annuity Guide.” So far I’ve reviewed Immediate and Longevity Income Annuities, Deferred and Equity Indexed annuities and in Hybrid Long-Term Care products.

Now that we have a basic understanding of the types of annuity products available, let’s explore some ways they can be used effectively within a financial or retirement plan.

(Additional) Tax-deferred Savings 

The first step toward saving for retirement is participation in your employer sponsored retirement plan assuming you have one available to you. If you are able, be sure to contribute at least the amount necessary to receive the maximum employer match. If you have capacity to save more than your employer’s plan allows or if you do not have an employer plan available, you could look to fund an IRA or you could contribute to a non-qualified annuity for additional tax-deferred savings. An attractive product in this situation would likely be a variable annuity because they accept ongoing contributions and offer a diversified set of investment options.

Death Benefits/Principal Protection

Most deferred annuity products offer a standard death benefit which guarantees a return of principal minus any withdrawals taken prior to the contract owner’s death up to a certain age. Some contracts offer enhanced or stepped up death benefits that lock in gains. The death benefit can be very important to people who want to protect principal for their estate or heirs while investing in equity markets.

Long-Term Care

According to Genworth’s Cost of Care Survey 2015, at least 70% of people over the age of 65 will require some form of long-term care services and support during their lives. The level of care needed will vary from $20/hour on average for in home care up to $250/day on average for a private room in a nursing home. You can reference the survey here to learn more about the different costs and how they vary from state to state. Not everyone will spend time in a nursing home, but with the average stay over 800 days long[1] it is important to plan for the possibility. Hybrid LTC products are discussed in the previous post and in a prior post from 2013 that discussed long-term care insurance.

Establishing an Income Base

The public stock markets can be quite volatile. Perhaps too volatile for a retiree to stomach. This would suggest that such retirees should allocate their assets conservatively. That may be true, but another option would be using an annuity to establish a guaranteed floor of income. In this situation the individual would purchase a SPIA to provide income that would cover all fixed expenses. With fixed expenses covered, the individual may feel more comfortable taking more risk in his or her variable investments.

Guaranteed Lifetime Income 

Annuities are most often sold and purchased on the premise that the contract owner would eventually “flip the switch” to create their own personal pension guaranteeing income for the rest of their lives. However, studies show that less than 5% of deferred annuity contracts ever get annuitized. The main reason for this is contract owners do not want to give up access to their principal. Recognizing this, insurance companies created contract features (optional riders) that guarantee a withdrawal rate for that person’s remaining lifetime. As long as the contract owner stays within the allowable rate, the insurance company will guarantee that withdrawal even if the contract value falls to zero. Due to the additional guarantee, this type of product is very expensive, but can be a good option for someone who needs additional income and is concerned with outliving his money.


Cleary Gull Advisors does not provide tax advice. Investors should consult with their financial and/or tax adviser prior to purchasing an annuity.

[1] Center for Disease Control and Prevention, Nursing Home Care FactStats, May 2014


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Views and comments expressed in this blog are those of the author and do not necessarily represent the positions of Cleary Gull or fellow Cleary Gull associates.