Why is this Topic Important to Wealth Managers? Today concludes chapter one of our series on “Wealth Management in Today’s Economic Environment”. The series has been designed to address the specific question many wealth managers are currently asking: “what are the best investment, retirement and financial planning tools given the current global financial position?” We have so far explored alternatives from “safe” to “risky” from “traditional” to “emerging” for the purpose of discovering and discussing the most relevant wealth management tools and techniques available today. We have so far enjoyed presenting this discussion and think you will find the information quite valuable. Please note that this series is presented in continuation starting with last week’s entries. That being said each blogticle resumes discussion from the previous day.
The economy has presented a number of issues for individual investors. Retirement savings were exhausted to a great extent in many cases caused by the financial crisis. Others lost large sums of investment capital. This series has explored a number of options available to clients and wealth managers with regards to investing in today’s economy. Today we present one option that many wealth managers are most likely aware of and can take advantage of starting immediately. As one commentator has noted, “[o]ver the past two years, investors have been taken for a wild ride. Annuities offer a way off the roller coaster.” 
We discussed last month the use of annuities as a substitute/addition to traditional government retirement plans. In sum, the financial condition of Social Security is far from great. Projected long-run program costs for Social Security are generally not sustainable under currently scheduled financing. Thus, we explained, the expected shortfall of federal funds available for retirement has presented a compelling reason to provide clients with fixed income retirement products.
Moreover, as we have previously mentioned earlier in the series, the baby boom generation continues to age and the American economy continues to undergo structural change. Two factors will continue to push investors to become more responsible for their personal planning. First, defined benefit plans are becoming obsolete as the retirement plan of choice for employers. Secondly, defined contribution plans likely won’t provide enough for baby boomers to retire comfortably. One study showed the average amount for retirement available in 401(k)s was only around $64,000.
What are some general considerations that should addressed by wealth managers with regards to annuities providing for retirement income to clients?
- Tax characteristics: as almost all wealth managers are aware the investment income from an annuity grows tax free. The return of capital also will not cause a taxable gain.
- Income stream: perhaps the most salient selling point of annuities is that they provide the annuitant with a guaranteed stream of income for life. The key here is to find a company that clients trust will provide safety and security so that they may rely on the company’s ability to continue to make payments.
- Timing: wealth managers and clients should almost always consider retirement age and projections when using annuity products for retirement income purposes.
- Fixed v. Variable: the client should consider the risk and reward functions available in different products. Many companies offer very advanced products these days and most advisors should be able to find something that fits well with overall planning goals.
Finally, indexed products may provide for the best of both worlds. We discussed earlier in the series the potential benefit of following stock indexes with regards to planning in today’s economy. Indexed annuities provide even further benefit to those planning for retirement as the gains in the market can be leveraged into regular payments.
We will continue this series throughout the summer. Please check back for more analysis and information regarding financial planning in today’s economy.
Next week’s blogticles will discuss tax and market issues relating to wealth management.
We invite your questions and comments by posting them below, or by calling the Panel of Experts.
Series Author: Benjamin Terner
 Ben Steverman. Annuities Offer Steady Income, Big Drawbacks. March 15, 2010. http://www.businessweek.com/investor/content/mar2010/pi20100312_316911.htm. Last Accessed 6/8/2011.
 AdivosrFX Advisor’s Journal. “Are Annuities Right for Your Clients?” http://advisorfx.com/articles/default.aspx?documentID=816&filename=fc060110-d.htm&action=24. Last Accessed 6/8/2011. Citing, Fidelity Investments Survey Feb. 2010.