Who really needs an annuity?
By Dan McGrath
Jester Financial Technologies
Do you have clients that are concerned about outliving their income in retirement? Of course you do — this is a legitimate fear for many Americans. A fixed annuity is often the best solution to offset that concern.
For those that might not be familiar with annuities, they have the ability to offer a reliable fixed amount of income, while also allowing flexibility, offering protection from chronic illnesses, long-term care disability, and a host of other benefits. Sounds like something a lot of people can use, right? But who should really own one?
We all know that Medicare and Social Security are two hot-button issues these days. Would it surprise you to find out that these weigh heavily on the question of annuity ownership? If one was to delve more deeply into the relationship between Social Security and Medicare, the answer to that question could easily be answered. Almost every single person that is planning on retiring at some point can benefit from annuities — especially those individuals who have not earned a lot in terms of a salary throughout their working career.
Let me elaborate. Once a person retires, the application for Social Security usually follows shortly thereafter. Unfortunately, once retirees are no longer covered by credible health insurance, they must now accept Medicare. Even more unfortunately, Medicare is not free.
It gets better. Not only is Medicare not free, but the premiums for Part B coverage must be deducted directly from a beneficiary’s Social Security benefit, while there is still a choice on what a retiree would like to do when funding their Part D premium (they can deduct through Social Security or pay through another means). Because of these deductions, the retiree’s expectations of “take-home pay” will fall short, especially if inflation rates of Medicare and the cost of living adjustments (COLAs) for Social Security remain the same.
According to Social Security’s Quick Calculator, a 60 year old who has earned an average of $60,000 for most of their working lifetime (assume 37 years) can expect a benefit of roughly $26,868, which is expected to inflate at roughly 2.8 percent. Using what we know about Medicare, if we add the Part B and D premiums (Part B is $104.90 a month and the average Part D premium is $53.26 a month) plus the inflation rates of 7.856 percent and 7.155 percent, the amount deducted from Social Security annually will be $3,173.81 at this retiree’s age 65.
The ugly truth is that a retiree’s Social Security benefits usually will not increase by much, and there will most likely be a point that their Medicare premiums will be larger than their Social Security benefit. Even while protected by the Hold Harmless Act (legislation designed to ensure that a person’s Medicare Part B premiums cannot exceed the annual COLA of their Social Security benefit) they will still lose benefits, because the costs associated with Part D are rapidly increasing as well.
By the time our retiree reaches age 88, their take-home benefit essentially plateaus after 21 years. For a comfortable retirement, this loss of income (especially in the later years when working will be out of the question) must be supplemented. The simplest and most effective way to provide this supplemental income? Fixed annuities. Designing a plan that will provide income for the rest of a client’s life is no easy feat. To do this effectively, financial professionals need to grasp the enormity of the changes to Social Security and Medicare and how these changes will affect their clients in the years to come. For investors, there has never been a more important time to be able to work with a well-rounded financial professional who is aware of the big picture.