The New Finance Of Longevity

The Durable Annuity Asset

Still paving the way to a smooth retirement

by Heidi Vanderkloot

Heidi Vanderkloot is Senior Vice President, Head of FMO Distribution Allianz Life Insurance Company of North America. Visit www.allianz.com.

When helping clients increase the potential of their portfolio for generating income during retirement, financial professionals may want to consider incorporate contingencies to the potential risks from increased longevity, lower equity returns, higher inflation and a volatile market.

These ongoing financial challenges have created a new retirement reality for Americans to navigate, according to the 2023 Annual Retirement Study* from Allianz Life Insurance Company of North America (Allianz). In fact, 61% of Americans say they are more afraid of running out of money than death.

Many common guidelines for retirement strategies may leave out an important asset that can help alleviate these concerns during retirement. For example, constructing a retirement portfolio with a mix of stocks and bonds could be limiting. And, using a 4% withdrawal strategy is only based on a portfolio’s initial balance. These strategies often overlook a key asset – annuities.

As part of an overall portfolio, annuities can help provide for flexibility and predictability in retirement, and help relieve worry and reduce exposure to risks that can derail retirement success like longevity, inflation, and market volatility.

Portfolio Flexibility

Incorporating an annuity into a client’s retirement strategy can help complement a client’s investment strategy and create flexibility. While investors often rely on stocks for growth potential and bonds for protection, an annuity may help diversify an overall financial strategy by offering a balance of performance potential and a level of protection against market downturns (although certain fees and expenses could reduce contract values). It offers another way to diversify a portfolio.

Beyond guaranteed income that lasts a lifetime, an annuity can also offer tax-deferred growth potential and a death benefit during the accumulation phase.

Many modern annuities have innovative options that offer growth potential and a level of protection. This helps offer flexibility for navigating rapidly changing market environments. Product innovation with both fixed index annuities and registered index-linked annuities is offering investors flexibility to work toward their retirement goals. The new flexibility allows clients the ability to adjust crediting methods or other strategies.

Clients also have the flexibility in how they choose to add the asset to their portfolio, such as annuity laddering. For this strategy, clients purchase multiple annuities to spread out principal, stagger payout dates and take advantage of different types of annuities.

With the guarantees of an annuity within an overall portfolio, it can help clients feel comfortable making more aggressive investments elsewhere. This strategy can have significant impact while clients are accumulating money for retirement using accumulation-focused annuities.

Income Predictability

The predictability provided by an annuity with guaranteed lifetime income is one of the most straightforward benefits for a client creating a retirement income strategy. And, it eases one of clients’ biggest worries in retirement – running out of money.

The predictability provided by an annuity with guaranteed lifetime income is one of the most straightforward benefits for a client creating a retirement income strategy. And, it eases one of clients’ biggest worries in retirement – running out of money...

Reliable income sources are a foundational part of a retirement income strategy for your clients. Social Security benefits help Americans establish their reliable income for retirement. Then, if clients want to help increase the portion of their retirement income that comes from reliable sources, they may want to add an annuity to their portfolio.

Relieving Retirement Worries

Many clients seek to have enough reliable income in retirement to cover their essential expenses like food, clothing, shelter, taxes, and health care. Often, this means trying to have the majority of a client’s retirement income from reliable sources. This can help ease worries about longevity. For clients, knowing that they will be able to cover their essential expenses not only during retirement, but also throughout their life, is a huge relief.

Clients’ other forms of personal savings like 401(k)s are, of course, important components of the overall retirement plan. However, they are subject to various risks like market volatility and have no guarantees for how long they will last.

Annuities are able to offer upside potential with principle protection that can help manage risk and volatility. Some annuities offer the potential for income increases every year the contract earns an interest credit – guaranteeing the new higher payment for the rest of life of the policy. This opportunity for increasing payments can help retirement income keep pace with inflation, which over time can erode savings.

An Opportunity For Clients

While many people could benefit from planning that views annuities as a valuable asset, here’s one use case example. The Women, Money and Power Study** from Allianz Life Insurance Company of North America (Allianz) found that women in particular could benefit from a holistic retirement planning that incorporate risk management strategies like annuities.

While women reported increasing financial responsibility, fewer said they feel financially secure. The number of women who said they feel financially secure dropped from 72% in 2021 to 64% in 2023. At the same time, just half of all women (52%) said they feel confident about their retirement plans. And the top worry keeping them up at night? Running out of money in retirement.

When considering risk exposures like longevity, it’s important to note that women typically live longer and are more likely to be caregivers to parents and children. So, incorporating risk management strategies like annuities into their long-term financial plan could help provide that predictability to help ease their concerns.

As part of an overall retirement portfolio, an annuity can offer predictability and flexibility to create a retirement income strategy. Annuities can help reduce exposure to the risks to retirement presented by longevity, returns, inflation, and market volatility by providing lifetime income (which may be available through an additional cost benefit rider) that has the potential to increase in retirement. In the end, clients want assurance that their retirement strategy will work for them so that they are able to seek their retirement goals.

 

 

 

* Allianz 2023 Annual Retirement Study of individuals age 25+ with an annual household income of $50k+/$75k+ (single/married) OR investable assets of $150k+.

** Allianz 2023 Women Money Power Study of women age 25-75 with an annual household income of $30k+.

 

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