How modern annuities can help address client concerns in a volatile market
by Corey WaltherMr. Walther is president of Allianz Life Financial Services. Visit www.allianzlife.com
As Americans grapple with an unexpected and abrupt end of the bull market and the effect it is having on their finances, it can be helpful to reflect on your clients’ experiences over the last decade to gain a better understanding of their current mindset and how you can assist them during these unprecedented times.
It’s sometimes been said that going through a bull market, including this most recent one, can feel a lot like riding an upward escalator. It may be a gradual, mostly pleasant ascent during which clients enjoy steady growth with periods of low volatility. They typically don’t have to make many rash decisions about their investments or retirement plan, and tend to focus on building wealth through the accumulation of assets.
A bear market, on the other hand, can sometimes be compared to an elevator ride down – a quick drop with little time to react. In a market environment like the one we have seen over the past few weeks, clients might be dealing with understandable feelings of panic and helplessness. Clients are suddenly faced with a number of difficult questions, including how to rebuild a retirement nest egg large enough to retire when and how they want – particularly if past concerns were focused on asset accumulation without incorporating solutions for protection.
No Easy Answers
Unfortunately, for those who are near or already in retirement and did not have a portion of their assets protected from market downturns, there are no easy answers or silver bullets to regain what they may have lost. Although there may be a road to recovery, it will take time, patience and a willingness to ride the ups and downs of the market rollercoaster again until the next consistent upward trend begins.
For others that are further out from their retirement start date, in addition to rebuilding their assets to achieve their retirement goals, many might be searching for options that will provide some level of protection against market risks for a portion of their retirement portfolio going forward.
This can be particularly challenging in a low-interest rate environment where more conservative options such as money-market accounts, CDs, or bonds aren’t generating the types of returns that can help retirement savings get back on solid footing nor provide a lifestyle-sustaining income level when factoring inflation rates. Furthermore, clients may have to contend with retirement goals that need to shift due to unforeseen changes in their circumstances, as well as addressing the risk of retiring in a declining market (known as sequence of returns risk) and the risk of outliving their retirement assets (known as longevity risk).
Importance of Flexibility and a Level of Protection
This retirement dilemma calls for a solution that provides flexibility – something that is not usually associated with annuities, which are often maligned for being too rigid and not allowing people to make adjustments or take advantage of market growth.
Yet, the annuity industry should be one of the first places that financial professionals explore when looking to provide these kinds of benefits to their clients. Annuities have made significant innovations over the past few years that can provide great flexibility and control, while still maintaining their chief purpose: asset growth with protection and to provide a source of guaranteed income that can help ensure people don’t outlive their money in retirement.
New features being added to products – like some allocation options having the ability to lock in index values once during a crediting period to help take advantage of market gains, but still provide a level of protection if the market drops – means annuities are becoming more dynamic, and can be used to address a number of client needs.
A quick review of current annuities that offer both a level of protection and growth potential can put you in a better place to help assist clients in addressing the dual challenge of building and protecting assets in this low-interest environment.
Fixed Index Annuities
Often considered less risky because they provide complete principal protection from market downturns, fixed index annuities (FIAs) can help your clients accumulate money for retirement and provide guaranteed income after they retire. A fixed index annuity may be a good choice if they want the opportunity to earn indexed interest, but don’t want to risk losing money in the market. This can be effective for people who need to start rebuilding their savings, but are understandably skittish due to the extreme market volatility we’ve experienced over the past few months.
While principal protection and opportunities for tax-deferred growth are key attributes of FIAs, flexibility may be what really drives their value in this current environment. Some FIAs offer riders (either built in or at an additional cost) to help your clients address specific needs and many provide a variety of crediting methods and flexible options for receiving guaranteed income in retirement.
In fact, new innovations provide options for clients who are seeking more control over how they create their guaranteed income, as well as the flexibility to change their retirement strategy if their situation changes. This may be appropriate for people who are now feeling behind on their retirement savings and also want the option of accessing retirement income early and on their own terms.
One additional financial challenge that FIAs can help address is the rising cost of living in retirement. In addition to building and protecting assets, people will need to make sure they can address inflation risk so their savings don’t lose too much purchasing power over time. In fact, according to a recent Allianz Life Quarterly Market Perceptions Study*, nearly half of Americans think that the rising cost of living is a big risk to their security in retirement.
Thankfully, some FIAs also provide the opportunity for increasing income (provided through either built-in or optional riders at an additional cost) that can help your clients address inflation and build a more secure retirement.
Index Variable Annuities
Falling in the middle of the risk/return scale, index variable annuities (IVAs)(also called registered index-linked annuities) can also help accumulate money for retirement and provide the potential for more growth if your clients are willing to take on some market risk. In recent years, IVAs with lifetime income benefits have been introduced to the market – some with the option to receive increasing income similar to their FIA counterparts.
Through their crediting methods (sometimes also called index strategies), IVAs allow your clients to trade some potential gains from market growth in exchange for a level of protection from down markets. IVAs do this by giving them a choice of index options – along with traditional variable options – so they can choose their allocations based on their goals and risk tolerance. Your client’s contract value may increase or decrease depending on the performance of the index and variable options they choose.
IVAs can be a good option for clients who are closer to retirement and don’t have as much time to make up for any recent losses, but still want to add a level of protection to a portion of their portfolio so they may be better protected from the next black swan event. They may also be considered for risk-averse clients 5-10 years or more from retirement to provide diversification from a moderate allocation strategy.
Consider Tax Implications
In addition to helping clients rebuild assets (accumulation) and help ensure they have a regular source of guaranteed income (decumulation), another important consideration that both FIAs and IVAs can help address is taxes.
Given current government stimulus meant to help deal with the COVID-19 pandemic, taxes may look different in the future and may include increases. Tax efficiency within a portfolio may become increasingly important, so the tax-deferred growth opportunities, offered by both FIAs and IVAs, can be a welcome feature as your clients look for options that can help them rebuild their finances for retirement.
More than ever, investment, risk, and tax management represent a three legged stool that financial professionals and tax advisors should consider discussing with their clients who find themselves challenged by the current environment. No longer do we have the luxury of a bull market where we can focus on helping clients build assets and hope to ride that escalator higher and higher.
It’s crucial that we evolve our thinking to ensure we’re taking each leg of that stool into account as we work with our clients to help them prepare for the future. Annuities can help in each of these areas, and innovations within the industry have added the flexibility necessary to assist clients in moving forward with greater confidence.
*Allianz Life conducted an online survey, the 2019 4Q Allianz Life Quarterly Market Perceptions Study in November 2019 with a nationally representative sample of 1,005 respondents age 18+.
Withdrawals will reduce the contract value and the value of any protection benefits. Additional withdrawals taken within the contract withdrawal charge schedule will be subject to a withdrawal charge. All withdrawals are subject to ordinary income tax and, if taken prior to age 59 ½, may be subject to a 10% federal tax penalty.
Annuity guarantees are backed by financial strength and claims-paying ability of the issuing company. Variable annuity guarantees do not apply to the performance of the variable subaccounts which will fluctuate with market conditions.
Diversification does not ensure a profit or protection against a loss.