After all, Americans want the benefits that today’s products have to offer
by Carolyn JohnsonMs. Johnson is CEO of Insurance Solutions for Voya Financial. As an integral part of the company’s Retirement and Investment Solutions operation, the Annuities business offers fixed, fixed-index, immediate annuities and custodial mutual funds aimed at helping individuals save and protect their retirement savings. Visit voya.com
When financial advisors mention the word “annuity,” some clients may immediately tune out. There’s no denying that annuity products have what most publicists would call a bit of an “image problem.”
Once you sort through all the misinformation and half-truths, however, the reality is that these solutions are exactly what Americans are asking for when trying to navigate today’s retirement landscape. Like any celebrity or politician looking to enhance their persona, it’s time for annuities to polish things up.
LIMRA’s Secure Retirement Institute conducted a recent study1 where they asked consumers what they wanted in retirement.
More than 35 percent of respondents said they wanted to “gain peace of mind” that they would never outlive their income; 31 percent wanted to “feel protected” knowing their living expenses would always be covered by guaranteed income; and 22 percent said they wanted to “live worry-free” in retirement by knowing their income was protected from market downturns and other risks. In most cases, annuities can offer individuals all of these benefits and more.
Recent market volatility, historically low interest rates and the decline of traditional pension plans also underscore the need for dependable income solutions in retirement.
Given this backdrop, it’s not only smart — it’s prudent — for a financial advisor to consider adding an annuity product to their client’s retirement portfolio. This is especially true when you take into account the Department of Labor fiduciary rule.
While many annuity distributors are still deciding on their go-forward strategy, the new regulations will likely drive product innovation and transparency across the industry, while making annuities more attractive to advisors and their clients.
10,000 People Turn 65 Every Day
And of course, let’s not overlook the growing demand from the millions of individuals who will need professional financial help in the future.
Additional LIMRA analysis2 tells us that approximately 10,000 Americans reach the age of 65 every day with that figure projected to further increase as Boomers get older. This presents a huge opportunity for advisors. When incorporated into a holistic retirement plan, annuity products can help advisors build a diversified portfolio and create value for their clients.
But first, advisors need to better educate their clients on the potential benefits that annuities can deliver, while “buffing up” their image. Below are several suggestions on how to frame the annuity conversation, along with tips that every advisor should consider when guiding their clients.
Framing the conversation: Annuities can help protect and grow retirement assets
- Principal protection: This is one of the most attractive features when it comes to fixed and fixed-index annuities. The ability to provide protection against a declining market is critical for those who have just retired and for those who are planning for the future. Looking back over the last 16 years, there have been several notable periods of market turbulence and corrections3, including the tech bubble years (2000-2002) as well as the recession period that began in 2008. For people who retired at these times, they either had to supplement their income or adjust their lifestyle on far fewer assets. Yet, advisors who placed their clients into fixed or fixed-index annuities prior to these bear markets saw many favorable outcomes. Those individuals benefitted from having a built-in floor that protected them from losing the value of their original investment even when the markets declined.
- Growth potential: Many Americans who experienced significant loss in 2008 were hesitant to get back into the market. But putting money into solutions that are too conservative is not the answer, either. For example, many people have money sitting in a savings account or certificates of deposit (CD) earning next to nothing in returns. Advisors should be asking their clients a simple, yet important question — how is their money working for them? Due to the higher interest rates that they often provide, fixed and fixed-index annuities can offer greater growth potential compared to a standard savings account or CD. Fixed-index annuities also provide upside potential. Plus, they provide individuals with confidence knowing their principal is protected from market volatility.Many Americans who experienced significant loss in 2008 were hesitant to get back into the market. But putting money into solutions that are too conservative is not the answer, either
- Tax-deferred benefits: Every dollar is important when it comes to retirement, so having a solution that provides growth on a tax-deferred basis can bring tremendous value to a client. Annuities can offer this important feature, allowing money to grow tax-deferred until it is needed. What’s the benefit to the client? Compounded returns. Since capital gains taxes are deferred and not taken out each year, the client’s assets can grow at a faster rate. Plus, any gains made are invested back into the annuity. Over time that compounded growth can add up.
- Bonuses: Certain annuities provide an up-front bonus to a client’s accumulation value. Consider someone who purchases a fixed-index annuity with a premium bonus at the start of the contract. First, the bonus gives them an extra boost to their overall account value. Second, because the client now has a larger contract value, they can potentially earn greater gains when the markets are favorable. This initial bonus plus the compounded growth can result in a bigger benefit.
- Income riders: Income riders, which can be purchased as additional contract features to help solve for longevity risk, continue to grow in popularity. First, they can provide guaranteed monthly income. Second, most income riders offer a compounded growth component. For example, a rider that provides 6.5 percent compounded growth up to ten years can be extremely helpful in creating a sufficient stream of retirement income, while also providing greater confidence for the future. This is especially true when you ask a client what they’ll do for retirement income when they are 80, 85 or 90.
Best tips every advisor should know about annuities
- Show your clients the value of principal protection: Negative returns early on in retirement can have a sizeable impact on the rest of an individual’s retirement. For example, if a client’s account lost 35 percent of its value during their first year in retirement (like many did in 2008) they would need to experience a 54 percent positive return to recoup their losses. This would likely take years of a bull market to achieve. Therefore, protecting your client’s assets from a sizeable loss due to unpredictable market volatility is a significant benefit — not only from a financial standpoint, but also emotionally.
- Show the real-life benefit of income riders: These have become an extremely vital tool when helping a client with retirement planning. The real-life benefit of a rider is two-fold: it can provide a monthly stream of guaranteed income while also creating income you cannot outlive. This can be a win-win for any client worried about running out of assets in retirement.
- Determine what portion of their portfolio needs to be safe from market loss: As most people near retirement, their risk tolerance tends to become more conservative. Some will want 100 percent of their assets safe from market loss, while others will only want a portion protected. By helping them determine what portion needs to be safe, you are providing peace of mind.
- Consider helping clients with their non-qualified assets: In the annuity industry, the focus tends to be on the assets that need to be moved from a qualified plan into an IRA. But advisors should also be considering a client’s non-qualified assets and how to maximize their retirement income planning. Make sure to take a holistic approach in your conversations and find out if annuities can be an effective solution for their out of plan assets.
- Protect your clients against longevity risk: Individuals are living longer today. In 1940 when Americans started receiving Social Security benefits, the average life expectancy was 65. Today, one-in-four who have reached age 65 will live past 90, according to the Social Security Administration. By addressing the topic of longevity risk with your client, they may be more inclined to see the true value that an annuity provides. This will go a long way in building their trust and helping them prepare for a secure financial future. ◊
1) Framing Guaranteed Income (to be published), LIMRA Secure Retirement Institute, 2016. The study is based on 5,020 consumers.
2) LIMRA Secure Retirement Institute analysis of U.S. Census Bureau’s Current Population Survey, March 2014 and National Population Projections, 2014.
3) Callan Periodic Table of Investment Returns; analysis of annual returns for key indices ranked in order of performance (1996-2015), 2016 Callan Associates, Inc.