The Low Interest Rate Opportunity You’re Missing


Annuity Awareness Month means different things to different people. Personally, I like to concentrate on the proper uses of annuities, regardless of the economic environment. 


Too often, especially lately, I hear advisors talking about rates being too low to consider annuities. But, I think low interest rates provide a unique opportunity to show how annuities create tax efficiencies in income planning.  


As planners, one of the obstacles we face is the misuse of social systems for income. Today, only 4 percent of women and 2 percent of men elect to take Social Security at age 70 so they gain the maximum income for life on an inflation-adjusted basis. I talk to many advisors and clients about maximizing the government’s programs as a base income level. Single premium annuities can be a perfect fit for bridging that gap between early retirement and higher income levels for life. 


Take a Closer Look

With today’s “low interest rate environment,” annuities generate a more tax-efficient income than ever before. If you position a single premium immediate annuity with an eight-year period certain, 95.6 percent of the income is tax free (return of basis). This allows you to position income with non-qualified assets between ages 62 and 70 equal to what would have been early retirement income levels. With tax-free distributions, you have lowered the client’s tax bracket, allowing you to convert pre-tax dollars in an IRA to after-tax dollars using Roth conversions. 


The net effect is that your client …

  • Has converted more of their qualified funds at the lowest possible tax bracket
  • Maximized their Social Security benefits
  • Gained a higher lifetime income 
  • Is more likely to receive tax-free distributions after five years from the Roth conversions


All along, the income annuity (as of May 2017) earns a 1.16 percent rate of return, which is typically higher than most certificate of deposit rates and comparable to U.S. Treasury rates for similar durations.  


So, if you ask your clients if they would like to maximize their Social Security, reduce the tax on their qualified money, and create more lifetime income, how many do you think would say, “Tell me more”? My guess is that will start a conversation with a client or prospect. And, that’s why I get excited about making your clients aware of annuities during low interest rate period – tax efficiency. 


Winning Strategy

Talk to your clients who have indicated that they want to retire early, at 62 or 65. Give them options that create tax efficiency in their portfolio, regardless of the interest rate environment. Make your clients aware of the possibilities with annuities. That’s real #AnnuityAwareness.