From the March 2009 issue of Investment Advisor • Subscribe!

Searching for Security

As affluent retirees' worries about their financial well-being continue to mount due to the market and economic swoon, sales of immediate annuities are seeing a significant spike.

While new fangled products with lots of bells and whistles continue to flood the retirement planning market, immediate annuities provide a simple distribution vehicle for retirement income, says Bryan Place, an advisor and president of AnnuityQuickQuote, an immediate annuity online shopping service.

In fact, Place points out that while numbers for all of 2008 are not yet compiled, immediate annuity sales through the third quarter increased 26% over 2007, reaching $5.9 billion, according to LIMRA. "The [S&P 500] was relatively well behaved through the end of the third quarter, only falling 13.1% " Place says. "Much of the markets losses came in the fourth quarter last year, with the S&P 500 falling more then 23% for the quarter. So even though we don't have full year immediate annuity sales figures, I fully expect the numbers will reflect that sales continued at the rapid pace we saw through three quarters as investors sought the safety that immediate annuities offer." The volume of immediate annuity business through AnnuityQuickQuote "increased substantially in the second half of 2008 in all parts of the country," Place notes. "In the majority of the conversations I have had with clients they have focused on safety and sustainability of income, stating that this is reason they chose the immediate annuity."

Indeed, study after study these days is revealing retirees' search for guaranteed income streams. The most recent survey of affluent retirees performed by MFS Investment Management found that they "expressed significantly lower levels of financial comfort, greater concern about further major market declines, and higher interest in guaranteed income streams for retirement" than the same survey segment did just last August, immediately prior to the precipitous market sell-off.

In October, respondents to the MFS survey ranked the guaranteed payment stream as the single most important factor when choosing an investment (35%, up from 23% in August). By contrast, MFS says that 24% in August picked the ability to make decisions about how money is invested, diversified, and allocated as the most important factor; in October the popularity of that response had declined to 19%. Earlier survey work commissioned by MFS "showed that advisors on average recommend that investors begin the retirement income planning process at least 10 years before retirement, but that nearly half of pre-retirees 55 or older do not have such a plan in place, and over a third did not have any plans to discuss the topic with their advisors."

The MFS surveys did confirm that respondents "consistently expressed higher levels of satisfaction, comfort, and optimism if they had a detailed retirement savings and income plan than those respondents who did not."

The key to a successful income stream is annuitization, so Place offers this case study. Assume we have a husband and wife both 65 years old with $1,000,000 saved for retirement and an income need of $45,000 annually. "In order to guarantee this income for both their lives in an immediate annuity they would need to deposit $647,946, leaving $352,054 to further invest or save for possible inheritance," he explains. "If the same client was interested in a cost of living increase of 3% on this immediate annuity, they would need to deposit $872,622. This would leave them with a 4.5% income guaranteed which increases by 3% annually while keeping $127,378 available for emergencies." Place notes that a common income strategy that he implements with his clients "is to determine the fixed expenses they will have during retirement and solve for the required deposit into the immediate annuity. This gives clients an income guarantee for their fixed expenses and allows them to stay in the market with remaining assets to act as their longer term inflation hedge."

Reprints Discuss this story
This is where the comments go.