How advisors can help manage the emerging risks to a client’s retirement portfolio
by Eric ThomesMr. Thomes is chief distribution officer with Allianz Life. Visit www.allianzlife.com.
It’s certainly an interesting time to be in the retirement industry. A number of different factors are at play that are changing the way financial professionals and their clients should be thinking about retirement strategies.
One major change is the proposed Secure Act 2.0, which has the potential to alter the way many Americans save for retirement. Provisions like auto-enrollment for employer 401(k) plans and increasing catch-up contribution limits would benefit a number of Americans who perhaps have work to do on their retirement savings.
At the same time, ongoing and severe market volatility also has no end in sight, and is impacting Americans’ finances both in the short and long term.
And hanging over all of this is the soaring inflation rate, which hit 9.1% in June 2022 – it’s highest level in over 40 years.
With all of these changes and risks facing Americans as they attempt to navigate both day-to-day and long-term finances, worries over retirement strategy may be on their mind. And today’s annuities have the potential to help. Annuities offer tax-deferred growth potential, a death benefit for loved ones during the accumulation phase, and a guaranteed stream of income at retirement.
What’s more, today’s annuities are new, enhanced and designed to better meet the needs of today’s consumer, and solutions can be better tailored to help meet defined outcomes and balance clients’ risk/reward objectives.
Addressing Market Risks
Market volatility is top of mind for many consumers today. Those looking for a level of protection from market risks could consider annuities for a portion of their overall portfolio as a way to help protect retirement savings from these market swings. Some annuities such as fixed index annuities (FIAs) protect all of a client’s principal from market downturns for those who are more risk averse. But for those who want to take advantage of market highs as well, other types of annuities such as registered index-linked annuities (RILAs) can offer greater potential in exchange for some market risk.
Variable annuities are subject to investment risk, including possible loss of principal. Investment returns and principal value will fluctuate with market conditions so that units, upon distribution, may be worth more or less than the original cost. Beyond the basics of these products, there are a number of new and enhanced features that can also help address market risks. Allianz Life Insurance Company of North America (Allianz Life) offers lock features on select FIAs and with select index strategies (also called crediting methods) in the Allianz Index Advantage® suite of RILAs. The manual lock features allow clients the opportunity to lock in an index value once for each index allocation option selected during a crediting period, and receive a positive credit.
There is also an automatic lock feature, which gives clients and their financial professional the ability to set one or more targets (above or below the current daily adjustment) for any of their Index Option Values at any time before a lock is executed each term. If a target is met, it will be automatically locked in until the end of that crediting period.
This innovative feature gives clients the flexibility to help capture increases or limit losses during times of uncertainty and also helps decrease the probability of receiving zero percent interest credit on FIAs, and negative index performance until the end of term on RILAs. By electing the lock feature, clients will no longer participate in any potential gains (or losses) for the rest of the term. The index value used to determine credits may be higher or lower than the index value at the time of request.
Multi-year term index and crediting options are another way to help mitigate market risks. These longer terms are designed to begin higher and increase gradually throughout the multi-year term. The Multi-Year (MY) point-to-point crediting method, which was just added to select Allianz Life FIAs, can be combined with index lock to offer clients greater accumulation potential associated with long-term crediting – but without the long wait.
Managing Inflation Risk With Increasing Income
Americans can’t run from inflation. While clients may have first started to notice the pinch at the grocery store or the gas pump, as inflation persists, those closer to retirement may be starting to consider how inflation could impact their retirement income, and whether that income has the potential to increase over time to help address the rising cost of living.
And while some sources of income, like Social Security, have cost-of-living adjustments (COLA), those increases only apply to that income source. What’s more, it doesn’t always keep pace. For example, the 2021 COLA was 5.9% but the 2020 COLA was only 1.3%. That means there is often a gap between what clients determined their retirement income would be and what their expenses actually ended up being.
Annuities offering guaranteed retirement income that retirees can’t outlive in retirement can help address these worries. Some annuities even offer the opportunity for income increases throughout retirement through riders that may either be built in to the contract or optional and available for an additional rider fee.
Understanding not only the various risks that clients are worried about today, but also strategies to help address them is important for financial professionals. Not only in the short term to help manage day-to-day risks from market volatility and inflation, but also to help them feel confident as they approach and enter retirement.
A recent Allianz Life study* found that more than nine in 10 Americans (93%) say setting financial goals and developing a plan to achieve them is important to helping them support their future ambitions, with another 86% citing the benefits of working with a financial professional. What’s more, 44% of Americans say making sure they have enough money to last their lifetime is one of the most important things financial professionals can do to help.
Today’s annuities can offer a number of potential benefits to clients who are worried about a plethora of risks. For financial professionals, understanding those risks, and how incorporating an annuity in an overall portfolio can help solve for them is a key component in helping clients feel more confident in their overall retirement strategy over the long term.
*Allianz Life conducted an online survey, the 2022 Retirement Risk Readiness Study, in February 2022 with a nationally representative sample of 1,000 individuals age 25+ in the contiguous U.S. with an annual household income of $50k+ (single) / $75k+ (married/partnered) OR investable assets of $150k.