Why Is My Broker/Advisor Recommending An Immediate Annuity Versus A Fixed Index Annuity And What’s The Difference?

When it comes time to figure out how much money you will need to draw from your savings on a monthly or annual basis, you may end up in a conversation with your advisor/broker for advice.

Your advisor/broker will most likely conduct a simple income analysis to determine precisely how much money (if any) you will need to pull from your investments to meet your monthly living expenses. The primary way to figure this out is by adding your fixed income with any other potential income sources to see if your total monthly income will meet your total monthly expenses.

If your total income from sources such as social security, pensions, etc., fall short of your monthly expense needs, this results in what is called your “Gap Income.” If after the review you find you have a gap income need, it will probably require a little help (i.e., withdrawal) from your savings to maintain your basic or minimum expense needs.
Ok so let’s say that we need an additional $1,000 per month or $12,000 per year to fill your gap income need. So, the question comes “What part of our savings do we take it from?” followed quickly by “How long will it last.” 

Many advisors are starting to recommend you take a portion of your savings and put it into an immediate annuity. Immediate annuities are a great way to create income and ensure your gap income needs are met throughout your retirement. By doing this, you will have created another guaranteed fixed income source, in addition to your social security and possible pension, which is designed to last your lifetime. 

Sound easy right? Here’s the rub. While immediate annuities are a good alternative for gap income, you lose control of the money once you transfer it into the immediate annuity. For some, that may be ok, but most of us like to maintain control, growth, and liquidity of all our money, it’s just human nature.

Let’s say You have $500,000 in your combined savings and it’s going to require that you move $200,000 of your savings to purchase an immediate annuity. While this money will serve to provide a lifetime of income needed for your gap coverage, you will lose control of the growth and the liquidity of the $200,000. Lack of control and liquidity is probably the most troubling reason why many who should buy an annuity don’t.

The good news is there is a safe alternative that allows you to have the best of both worlds, guaranteed income for your gap income needs and the ability to maintain control of growth and liquidity. 

It’s called the Fixed Index Annuity. The fixed index annuity can provide the same $1,000 monthly gap income that is guaranteed never to run out (just as the Immediate annuity does) however you more control of growth and liquidity of those same assets.

The fixed indexed annuity has become increasingly popular over the past 20 years or so. It is designed and fits well into your portfolio prior to, and throughout your retirement. This type of annuity allows you to choose from various index options that allow your money to grow when the market is performing well and protects your savings from every losing money in negative market periods.

The good news is that if you are one of those people who has considered using an immediate annuity for your GAP income but has shied away due to the fact you have to give up control and liquidity, then this may be the solution that solves your problem.

So why did my broker/advisor not recommend an index annuity?

The answer may be more straightforward than you think. Greed. You see when you move money to an immediate or index annuity the advisor loses his/her control of the ongoing commissionable portion of your portfolio. The immediate annuity is a lesser threat because its only purpose is to exchange a minimum portion of your savings and convert it into a lifetime income stream. However, the index annuity allows the same benefits of lifetime income while additionally enabling you to maintain control of growth and liquidity without the ongoing commissionable fee paid to the broker/advisor that you have been accustomed to paying. Thus, the immediate annuity for a broker/advisor is the lesser of the two evils. If they were to properly educate you on the index annuity, the fear is that you’d move all your money out of your brokerage account, or at least a good portion of it and put it into an index annuity …and that’s just what they don’t want you to do!


The underlying intent is to recommend you move the minimum amount possible out of your investments and into an immediate annuity to meet a portion, or all of your gap income needs, whereby expressing a more significant part of your savings stay invested in a diversified portfolio to have an opportunity to grow. The index annuity can do both very well.


Which creates more income, an immediate annuity or an index annuity?


It’s true that an immediate annuity may take less money to generate the same GAP income payment (that’s probably why your broker/advisor likes it) than what may be required of an index annuity, but it is usually a minimal difference. There are many insurance companies offering index annuities, and with the help from a properly trained licensed annuity advisor, you can find an index annuity that will be competitive with payouts compared to an immediate annuity. Even if it took 10% more assets to generate the same income payment as the immediate annuity, keep in mind your maintaining control of growth and liquidity of your asset whereas in the immediate annuity you give this up. 


So not only can the index annuity provide lifetime income guarantees without giving up control growth and liquidity, in many cases, they can outperform long term growth objective for that conservative portion of your portfolio without the advice (human interaction) and fees from your broker/advisor. 

 
So the simple truth is that your broker/advisor does not want to recommend an index annuity over the immediate annuity because they would be pulling back the curtain, and sooner or later their clients will realize they could have the best of both worlds with the index annuity; Income, and protection along with growth and liquidity, possibly without the need for advisor interactions and fees.

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