As Boomers Age, Expect Income Annuity Sales To Grow

By Bill LaVanne

They are 76 million strong and graying. Americas largest demographic–the Baby Boomers–began turning 56 this year.

As you may expect, the oldest boomers are increasingly turning their attention to post-retirement planning. Thats one big reason the insurance industry is betting immediate annuity sales are poised for explosive growth.

Also called income annuities or payout annuities, immediate annuities have definite appeal to this age group: They provide aging Boomers with “income insurance”–i.e., a guaranteed stream of income they cant outlive.

Given the continued demise of the once very common defined-benefit pension plans (which also guarantee an income stream in retirement), its not surprising to learn that immediate annuity sales are now on the rise (with lots of room for growth).

In 2000, for example, LIMRA International reported a 45% increase in annuity sales over 1999, with $4.2 billion of the $190.2 billion total going towards the purchase of immediate annuities.

More than any other generation, those born between 1946 and 1964 face unique financial challenges.

On average, Boomers waited longer to have children. A majority will enter retirement with ongoing financial obligations like a mortgage or funding a college education. They wont be able to rely on a lifetime pension from their employer.

Social Security, if its around by time the Boomers retire, will become available later in life and will replace only a small percentage of their pre-retirement income.

And, chances are good that Boomers will live longer than their parents and grandparents, thus extending the period during which they will need retirement income, compared to their predecessors.

What makes the immediate annuity such an ideal retirement planning tool for this group (and other newly minted retirees)? It can help create a balance between assets and liabilities–in other words, it can fill income gaps by matching income to expenses.

Recently, I used an immediate annuity to help a single, 65-year-old woman. She had rental income, Social Security and $250,000 in savings, but we determined she needed an additional $9,000 per year to maintain her current standard of living.

We could have tried to generate that $9,000 by investing her nest egg for income. But we felt that an immediate annuity would be more effective.

With $100,000, we were able to guarantee this income for life. And, by including 20-year-period-certain and life contingencies, if she died before her first payment, her beneficiary would be guaranteed $180,000 over the next 20 years.

Now, she has a lifetime source of income to meet fixed living expenses, like a mortgage. If she lives beyond 20 years, she has the comfort of knowing that the money will be paid to her for the rest of her life–something we couldnt have “guaranteed” had we tried to invest her savings for income.

She can also take advantage of the exclusion ratio, which allows only a portion of her immediate annuity payment stream to be taxed. It also permits us to manage her income so that her Social Security avoids taxation.

With her income needs covered, we are free to invest and manage her remaining $150,000 with other goals in mind–for example, to cover the effects of inflation, or to pay medical emergencies and other unforeseen expenses.

Without a plan, many retirees learn the hard way that bad investments, unexpected medical expenses, and self-indulgences can quickly erode ones life savings.

In fact, many seniors–regardless of how much they have when they retire–will eventually run out of money. The American Association of Retired Persons estimates that four in 10 Americans over the age of 60 will experience poverty at some point in their later lives. One in two will experience near-poverty (income between the poverty level and 125% of this level).

Todays Boomers increasingly have the sole responsibility not only for funding and managing their own retirement accounts, but also for ensuring their retirement savings last the 20 or more years they could be in retirement. An immediate annuity can give them the peace of mind of knowing they will have income that will always be there for them.

Bill LaVanne, CLU, is an independent representative and partner at SAFECO Life & Investments, Lake Zurich, Ill. His e-mail is billav@safeco.com.


Reproduced from National Underwriter Life & Health/Financial Services Edition, April 29, 2002. Copyright 2002 by The National Underwriter Company in the serial publication. All rights reserved.Copyright in this article as an independent work may be held by the author.