How annuities can help retirees enjoy their second act

Retirement-focused financial planner explains what holds adoption back, and advisors’ vital role in educating retired clients

How annuities can help retirees enjoy their second act

As Canadians confront longer lifespans, higher inflation, and lower expectations of market returns in the decades ahead, longevity risk has become an even bigger concern for retirement planning conversations – if that’s even possible.

For many retirees looking to avoid outliving their money, getting a steady stream of income for life from an annuity would go a long way toward solving the problem. And while the upfront sticker shock might be a cause for hesitation, it’s a mental barrier advisors should help their clients overcome, argues one planning professional.

“I think it's mostly an education element,” says Adam Chapman, certified financial planner and founder of YESmoney. “If you consider that annuities help people spend twice as much money per year in retirement, that means they're getting way more life out of their money and their retirement than if they don't.”

For many people, retirement is a difficult life transition to navigate, and for good reason. Among other factors, retirees may find it hard to shift away from the savings mindset that let them build up their nest eggs. Incorporating annuities into their retirement income planning, Chapman says, has helped countless clients at his practice ease into a decumulation mindset.

“It's about not looking at the money you hand away, but what you're buying with it,” Chapman says. “Really, what people are buying with annuities is the confidence to spend more money in retirement.”

With the rapid increases in interest rates from their near-zero lows as of March 2022, annuity products can now throw off higher levels of yield than they have in years, making them a more compelling option to address Canadians’ retirement income needs.

Over the past years, the industry has introduced other innovative solutions, including decumulation and tontine funds. Many professionals in the retirement income planning space argue there should be more options to help tackle the longevity challenge, but Chapman isn’t so sure.

“Sometimes adding more options doesn't help people make decisions any easier,” he says. “I find that we have great products available … It’s not to say we couldn’t have more. But the ones we have already do what the vast majority of people need them to anyway.”

One major problem with respect to annuities, from Chapman’s vantage point, is the fact that many advisors just don’t recommend them. While advisors are in the perfect position to explain the value of annuities in supporting their clients’ needs and expenses in retirement, he argues far too few are providing that education.

“There's a lot of advisors who make more money managing their clients’ money than helping their clients buy an annuity,” he says. “I think annuities have gotten a bad rap, and just haven't been spoken about enough for their actual benefits.

“The way the math works out, managing their clients’ investments for a year and a half is better than receiving a one-time commission on an annuity purchase,” Chapman says. “If you manage that money for 10 years, you’ll have made six times as much money as you would have if you’d helped the client buy an annuity.”

In implementing annuities at his practice, Chapman says he doesn’t accept commissions. By doing that, he says he’s able to convince clients that his annuity recommendations are made solely for their benefit and peace of mind.

“We do that just so our clients know, there's nothing in it for us. We're not suggesting this because we have any interest in this,” he says. “It's definitely the biggest uphill battle we face when trying to get people on that money-spending journey.”

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