Was it really the lost decade? If we look at the S&P 500 as an example, it really was a losing proposition over those 10 years. Statistics like these have forced boomers to consider strategies and solutions that they might not have looked at previously. Unless your client has immense wealth and can afford to completely avoid risk through money markets and short term tax-free bond holdings, they will need to maintain some exposure to the equity markets. Annuities are those unique products that afford your clients the equity market participation they need, plus some downside protection through various guarantees. You can add as many or as few of these features as you desire, and as a result, you transfer the risk to the insurance company for a fee.
I have previously written about boomers who do not have the luxury of pension payments and their need to create a fixed stream of income from a portion of their portfolios. The turmoil of 2008 once again showcased the perils of extreme negative market performance on retirement portfolios. A 2007 retiree drawing 5 percent from a 60/40 stock bond portfolio may have been completely devastated by a negative 37 percent rate of return in the first or second year of living off of their portfolio. Could you afford that large of a reduction in your income?
Don't misunderstand me. There are plenty of annuity products out there that are not worth the incremental cost. There are also plenty of extremely effective programs as well. However, the situation where the wrong type of annuity program is recommended and utilized occurs all too often. As advisors, our job is twofold: to know our clients, and therefore find the value in products and appropriately place the best solution for the client.
Ultimately though, everything reverts back to basic blocking and tackling, to use the football metaphor. What does your client need, and what are their goals? Advisors have to do the research, and understand the "gotchas" with these products. We have to know our clients, and know the product landscape. We have to talk to our clients about the risk of failure, and what we can do to improve that scenario. Being diligent in our research will result in being able to provide the most effective solutions. As I mentioned, the days of fat pension payments are over, and plans are being frozen in favor of "enhanced" 401(k) plans. Other than Social Security, some boomers may not have any other form of systematic monthly income. The dire predictions and precarious state of the Social Security trust fund are forcing boomers to identify other sources of dependable, dare I say, guaranteed income.
If you have read my articles before, you know that my mantra is that with change and turmoil come opportunities. Presenting annuity solutions is by no means a new or innovative planning technique. This is an excellent time to put some additional resources toward annuity research if you have not done so in the past. Boomers are living longer and more productive lives and outliving one's portfolio is a concern that I hear every single day.
In light of the current economic situation and the uncertainty with interest rates and taxes, I am excited about the prospects for 2010 and the opportunities that tend to present themselves during these times.
Mark A. Cortazzo, CFP is senior partner with MACRO Consulting Group in Parsippany, N.J.