How To Educate Clients About Annuities

Clients seeking income in retirement need to understand how different types of annuities can potentially help.

By Dmitriy Yankelevich
Dmitriy Yankelevich
Dmitriy Yankelevich

Annuities have come a long way since the early days of fixed products that would lock clients into unfavorable conditions without reflecting any upside of the market. However, high fees and the overall complexity of these products, as well as the inability of some advisors to properly identify the suitability of placing these products with their clients, continue to contribute to the bad reputation that annuities carry with them.

One of the viable solutions that I found in my practice to help bring annuities to my clients’ attention is to take the time to truly help them understand how these products work. I translate the complicated terminology into understandable digestible pieces, using simple descriptive language that clients can relate to.

For example, one client (a 57-year-old male) recently came to me with questions about how to secure predictable income in his retirement. We discussed some options, including investment portfolios consisting of stocks, mutual funds, bonds and ETFs. We also spoke about CDs and money market accounts, as well as income annuities. The client was interested in how variable deferred income annuities could be incorporated into his overall portfolio and how this strategy could help him achieve a better retirement outcome.

Seeking Income in Retirement

He wanted to make sure that his retirement nest egg would provide him with the necessary income to cover day-to-day expenses, medical bills and utilities. He was also seeking some protection against the unpredictability of market fluctuations.

The client had some appetite and risk tolerance regarding the market’s ups and downs, but he was approaching retirement and realized his ability to replenish his assets would soon decline once he was no longer employed.

We looked at a deferred variable income annuity as a way to provide him with both upside participation in the market, as well as growth over the years in a guaranteed annuity benefit base. He wanted reliable required minimum distributions (“RMDs”) during retirement. He also wanted to make sure that he would never run out of money during his lifetime, to which the annuity scenario played very favorably.

The client ended up investing in an annuity that offered him both upside participation in the market, as well as a guaranteed withdrawal rate based on the predictable growth of the annuity base. He was very happy to know that we exhausted all possible avenues of research before committing to this kind of an annuity. After investing a little over $500,000 in 2018 in this product, the market returned about 60% total in the last four years. This gave the client an opportunity to participate in this robust upswing, and brought the value of his annuity portfolio to more than $875,000 at the beginning of 2022.

After recent market volatility, the account value dipped to almost $800,000, but the client is happy knowing that his future annuity income will never be less than a pre-determined percentage (6%) of the highest account annuity value, which is currently “locked” at $875,000 (not at the current market value of $800,000). His guaranteed minimum annual annuity payment for life will be at least $52,500. The annual payment may grow if the market value of his portfolio surpasses the old “locked watermark” of $875,000, but it will never be lower than $52,500.

The Upside of Guarantees

The guarantees in variable deferred income annuities would make sense to a client who’s looking to minimize their exposure to the downturns of the market, as well as to have potential to participate in the upswings of the market. Typically, guarantees of this kind come with a hefty fee, so clients who are fee-conscious and are not as concerned about long-term market downturn effects would be better off participating in annuities without guarantees (structured or “buffered” annuities).

In a guaranteed income annuity, the growth of the investment account is based on the market performance of the underlying investments (similar to a 401(k) plan or an IRA). In addition, the client has an underlying guaranteed value of the annuity benefit base, which starts out at the beginning of the contract at the same value as the investment but has its own constant growth rate which is unaffected by any potential drops in the market. The account is cleverly constructed in such a way that over the years the two values (investment value and annuity value) are constantly compared with each other, and the annuity value would reflect the better result of the two.

In a year where an investment account based on the market returns results that are low, flat or negative, the annuity account value would grow at a predetermined rate of return. In a year when market rates are higher than the annuity growth rate, the annuity account value would be “matched” to the values of client’s investment account results. So, it’s a win-win situation for the client.

The No-Guarantee Approach

In a structured or “buffered” annuity without guarantees, no minimum guaranteed annuity growth rate is offered to the client. Instead, the downside of the market is “buffered” to a pre-selected extent. (Typically, 10%, 15% or 20% of the losses in the market would be absorbed by these buffers.). So, the client can definitely lose value of the account. For example, if a 10% buffer was selected and the market declined 15%, that would mean a 5% loss for the client.

In an annuity without guarantees, the upside participation in the market is also somewhat limited by so-called “caps” or ceilings. This means the client will only get positive returns up to that ceiling if the market goes above and beyond that level. Since there’s no hefty fee associated with these structured annuities (and a lot of times, no fee at all), these seem to be very popular tools to be included in a client’s overall portfolio.

Peace of Mind — and More

During our regular review sessions, clients who purchased annuities as part of their overall financial planning process usually report back lack of anxiety about the unpredictability of the market. They encounter less stress about diminishing values of their investment portfolios during market downturns and are more tolerant of uneven rates of return.

The idea that they have a predictable guaranteed income stream as part of their retirement strategy gives clients peace of mind as well as the ability to plan for a more exciting financial future. They can travel with more ease, afford a better lifestyle, and help their children and grandchildren financially.

How to Choose an Annuity

Figuring out the best kind of annuity for a client is not an easy task because there are so many different types and variations available in the market today. Having a strong financial planning process in place helps financial planners like me figure out the best option for the client’s situation. The choice should be based on multiple factors including, but not limited to, age, risk tolerance, time horizon of the investment and fee sensitivity, as well as the overall investment experience. There is no shortage of annuity providers offering new competitive products, where financial planners can do a true side-by-side, apples-to-apples comparisons of all fees, features and riders, and be able to pick the annuity best suited for the client.

Considerations for Couples

What percentage of a client’s portfolio should be tied to an annuity? We work backward and look at the minimum guaranteed income that the client requires in retirement based on our financial planning calculations. For example, if a client needs an additional $10,000 in guaranteed income and the guaranteed annual rate of annuity income is 5%, then the lump sum required to provide this annual income would be $200,000.

Annuities with joint income options are popular among couples who want to make sure the stream of payments for the first annuitant won’t stop with his or her death. Instead, the annuity will continue to provide necessary income for the surviving spouse for the rest of their life. While this option is very attractive, couples who consider this option need to keep in mind that the annual amounts received will be smaller compared with annuity payments based on a single life.

When Annuities Don’t Make Sense

In my opinion, an annuity would not be suitable for someone who is young (under 40 or 45 years old), who believes the market will ultimately perform very well, and who has enough time before retirement to recover any potential losses from market performance.

Additionally, an annuity would not make sense for someone who doesn’t need or want guaranteed income in their retirement because they already have enough fixed guaranteed income, such as pensions, Social Security, etc. to satisfy their annual income needs and to cover daily necessities and expenses.

Dmitriy Yankelevich, CFP, is a member of the Barnum Financial Group and is based in New York City. He can be reached at


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