The Annuity Conundrum
by P.E. Kelley
Mr. Kelley is managing editor of Advisor magazine and L&HA e-newsLink. Connect with him by e-mail:pkelley@lifehealth.com
In a recent survey that Saybrus Partners conducted, about how annuities are perceived and often misunderstood by consumers, information emerged that suggests a ‘disconnect’ with how these products actually work. Consumer perception, which is often informed by the retirement experiences of their parents, can be curiously contradictory.
Mark Fitzgerald is National Sales Manager for Annuity Distribution at Saybrus Partners, in Connecticut. He spoke with Advisor Magazine about today’s advanced and evolutionary designs (they’re not your grandfather’s annuities) and the need for strategic, earlier education for pre-retirees, which highlights more than ever the important role advisors play in getting this message through to their clients in time.
LHA: How does the average consumer comprehend the concept of income protection, as we know it in the industry?
MF: The response is actually different, depending upon whether the individual is pre-retired or post-retired. There is an interesting dynamic in play. When we questioned pre-retirees, they clearly expressed a pretty high level of confidence, about 70%, that they would be able to sustain their levels of income in retirement. However, with the post-retirees, we found almost the exact inverse.
L&HA: How have you interpreted this dynamic?
MF: With pre-retirees, we discovered a misunderstanding of what needs to be in place to provide the income required to satisfy their obligations. If you look at the average monthly Social Security check today, it’s about $1300. But if you compare that to 20 years ago, the relativity is much different. The shift in the dynamics of pension plans, which once comprised the lion’s share of a person’s retirement income, underscores an underlying trend: today’s retirees do not grasp fully how the equation has changed from a generation ago. In fact, they are only now just beginning to comprehend these dramatic shifts.
L&HA: What is the danger for consumers today during accumulation, who might be over-relying on IRA and 401(k) assets, if not fully aware that these assets may be wholly inadequate?
MF: One major component is a lack of understanding exactly what they can do with those assets. Whether they are in a roll-over IRA, or a contributory IRA if they’re still working. There are now a lot of new solutions available to them that they just are not a ware of. There is a disconnect in terms of understanding the qualification of the assets and the product choices available to provide the solutions they seek in retirement.
L&HA: How do today’s IRAs and 401(k)s differ from the bygone pension plan as an adequate accumulation vehicle?
MF: I think contributory IRAs and 401(k)s are great growth vehicles, with excellent diversification options available to build retirement dollars. But as clients approach retirement, and in deed enter it, having some guaranteed structure within these assets makes a lot more sense. Once their income-resources become finite, it is eminently important to remove as much uncertainty and unpredictability
L&HA: How do today’s consumers perceive what an annuity can do for them, and how has this perception changed from generations ago?
MF: That’s a great question. The basic difference is that annuities were once perceived as tax-deferred vehicles, from which you would withdraw when you were in a lower tax-bracket. They offered lifetime income guarantees, though not nearly as flexible as they are today. But pensions were much more prominent, so your clients might reason that they already have guaranteed income in place. At one point in time, that was viewed as a double redundancy. Today, however, there is a much greater environment of need, and we have seen the emergence of much more flexibility, much more components from a combination standpoint, such as enhanced benefits for confinement or critical care. Similarly, there are now enhanced benefits from a family protection standpoint with a guaranteed death benefit. So, this all ties into the future value of the assets, and not just the guaranteed income from it.
L&HA: What are the components of today’s competitive annuity?
MF: In general, the combination features have crossed the platform of variable as well as fixed- indexed annuities, so you’re going to have the guaranteed income structures behind it. You’ll have a death-benefit component and perhaps even a step-up guaranteed death-benefit component. There are both variable and fixed-indexed products with that have enhanced benefits should a client go into confinement, or lose the ability to perform 2 out of 6 daily activities. So, these features are all packaged together in addition to the primary tax qualification to what an annuity is and isn’t.
L&HA: How well do consumers understand the longevity risk?
MF: I think what illuminates it most is when they start to add up the numbers. The adage that says ‘people spend more time planning a 2-week vacation than they do planning for retirement’ is more commonplace than it should be. People just don’t put pen to paper and add up what is a very simple equation. For example, if you need $40,000 per year, at a 4% withdrawal rate you have to have $1,000,000.
L&HA: So, what is the challenge today for consumers to adequately accumulate their retirement asset?
MF: Simply put, it’s all about having an awareness of what’s available. There is certainly a disconnect as to how products are perceived, their functionality, and what they actually do. In our survey, we identified that 75% of Americans are very interested in the ‘diverse benefits’ that a product like an annuity can deliver, yet the percentage who said that they would consider an annuity was significantly less. They just don’t understand exactly what an annuity can do. It might be more accurate to say that they do not realize how much these products have changed over the years to respond to the changing dynamics of today’s retirees. Education is crucial, but more than ever it has to be done well before it becomes too late.
L&HA: Is there a savings gap in America?
MF: That is the essence of data that we uncovered in the survey, between how pre-retirees see their retirement and how it may actually play out once they arrive. That’s when reality kicks in. How much do they have and how is that going to support them for, potentially, 30 years or more? And at this point they haven’t yet even begun factoring the rising cost of living or a serious medical expenses.
L&HA: It seems, then, that for the industry there is an information-gap that needs to be filled. Is that a fair assessment?
MF: I think you’re spot-on with that assessment. I think that even as it relates to the income components of the products consumers still don’t fully understand the true flexibility behind it. These products have changed so dramatically in the last 6 years, along with the retirement landscape, these products have really begun to be tailored to these shifting dynamics.
L&HA: The survey identifies that 64%, many on the lower income levels, have not consulted an advisor to learn more. What’s preventing them from doing so?
MF: There are a couple of reasons behind this. Here again, the confidence level that we identified between pre-retirees and retirees may create a false sense of security, where pre-retirees may actually believe they’re ‘all set,’ only to discover hay are not. The products that are out there today hit a much broader demographic segment of the market, especially income demographics, making education so much more important.
L&HA: So, these really are ‘not your grandfather’s annuities…’
MF: They are absolutely not. We’re still in the early stages of growth with these new generation products. We’re on the front end of the opportunities, with the Baby Boom generation flowing into retirement and the transition away from standard pension based planning. So the mindset of ‘…well, this is how it worked for my parents…’ has to be, essentially, reeducated.
