“There is a train wreck I see coming,” says Chris Blunt, executive vice president, New York Life Investment Management, New York.
He is referring to the time when boomers hit retirement with Social Security, a 401(k) or other qualified accounts, and some savings but no plan for taking income safely. They will say, “I want my pension back,” and they will be “screaming for help,” Blunt predicts.
A new National Underwriter/New York Life telephone survey of 1,002 consumers shows the depth of their uncertainty.
The survey shows 40% of consumers “do not know” the percent of retirement savings they can safely withdraw yearly in retirement without running out of money. Another 48% said they could take out 5% to more than 25% a year. Only 10% said “less than 5%,” the number most often recommended by financial professionals. (See Chart 1.)
A companion National Underwriter/New York survey of financial advisors shows many advisors hold to the recommended liquidation range but not all.
For instance, 25% of advisors said that as a rule of thumb a healthy 65-year-old retiree can liquidate “less than 5%” from the retirement nest egg each year without running undue risk of outliving savings. Another 36% answered “5%.” Most experts agree those are safe percentages. But the remaining 39% of advisors thought otherwise: 26% put the liquidation rate at “6% to 10%,” while 9% said “11% to 100%.” Only 4% said they “don’t know.” (See Chart 2.)
These results have implications for financial services professionals and clients, according to sources interviewed by National Underwriter.
Clearly, consumers need help getting from asset accumulation to taking retirement income, says Ted Mathas, executive vice president of New York Life Insurance Company, New York. “The incongruity is that there is not a great practice model on the advisor side for doing that.”
Many advisors focus on asset accumulation, with tweaks for retirement income purposes, he continues. (A tweak could be using guaranteed living benefits on variable annuities but keeping the risk management and asset management processes in place.)
Instead, advisors can and should develop a new business model, he says, one that centers on helping clients replace the stability of regular monthly paychecks. This replacement would be a guaranteed income stream via income annuities or annuitization. This would focus on clients receiving a monthly check that will likely be higher than what they could get on their own if, say, they take systematic withdrawal, he adds. It would pay them income for life, so they won’t outlive their money.
That’s “income for life, not a lottery windfall,” adds Blunt.
Going forward, the immediate annuity could be positioned as a separate asset class within the retirement plan, he suggests.
Tema Steele, a New York Life agent based in Cherry Hill, N.J., has been focusing her practice this way for over a year. “My clients love it,” she adds, and “they send me referrals.”
Many new clients come with no goals or financial plan, Steele observes.
“They have worked and have income from Social Security and maybe a pension,” she says. “But when that is not enough and they go into principal, they get scared.
“They’re afraid they’ll outlive their money,” she says, so they go to see her.
Steele does not talk with clients about liquidation rates. Instead, she works conceptually, learning about their lives, expenses, emotional/psychological issues and so on. When it’s time to develop plans and choose products, she speaks of “creating a personal pension,” and “putting in guarantees and certainties to counteract the uncertainties of the world.”
She does use immediate annuities–and is a top IA producer at New York Life–but the products are positioned alongside other solutions. For instance, she might recommend the client place 25%-50% of assets in an immediate annuity.
Clients are happy with this, she says. “Most want to be OK, with whatever money they have.”
Clients in their 60s and 70s tend to get back about 8% in principal and interest, she adds. That sounds “very good” to them, especially since the money is not subject to market fluctuations and is held at a top-rated company, she says.
Unfortunately, says Blunt, the NU/NYL survey also shows there is “a disconnect” between needs of the market for such guidance and the readiness of advisors to meet those needs.
In the advisor survey, for instance, 65% described themselves as “very knowledgeable” about helping clients create guaranteed retirement income streams. And 96% said the ability to get guaranteed income for life is either a “very” or “somewhat” important advantage of annuities. However, 97% of advisors also said they have more knowledge about astronomy than about fixed immediate annuities.
What’s more, immediate annuities are not at the top of the products about which advisors said they are “very” or “fairly” knowledgeable. The top products are mutual funds (96%), variable deferred annuities (93%) and fixed deferred annuities (90%). Immediate annuities come fourth (88%).
Actual sale of payout products indicates that immediate annuities are not on the front burner, points out Mathas. “Their sales represent just a tiny fraction of all annuity sales industrywide,” he notes.