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Boomers Seen As Good Fit For Inde Annuities

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Are baby boomers a good market for fixed index annuities?

Apparently so.

Marketers say boomers’ well-recorded penchant for trying new things contributes to their willingness to consider purchasing the products–policies that still are relatively new compared to traditional fixed annuities.

More importantly, they say, index annuities are often well suited to boomers’ growing interest in putting retirement savings in vehicles offering upside growth potential and no downside risk.

“The retirement savings accounts of many boomers are still down by over 35% compared to their market highs early in the decade,” points out Thomas Brueckner, president of Senior Financial Planning, Nashua, N.H.

“That concerns them. They are looking at the war, the hurricanes, the demands on Social Security and Medicare, and they see a fiscal tsunami ahead, unless Congress does something,” he says.

“The younger boomers, in particular, are concerned that Social Security won’t be there for them–and they have good reason to think that way.” [Note: "Older boomers" refers to boomers now in their 50s, while "younger boomers" refers to those now in their 40s.]

Additionally, Brueckner says, bank certificates of deposit now are paying “ridiculously low” interest rates. And bonds are “not a good place to be” during a rising interest rate environment.

Considering all of that, he says, the index annuity is becoming the product of choice for boomers seeking safety of principal. “They lock in their gains annually,” he says, “and they have no downside whatsoever. These are products that will help them get back what they lost without risking what they have left.”

Boomers age 55 and up can be especially well suited to index annuities, says Troy Patton of Indianapolis. He is director of financial services for Fiducial Investment Advisors Inc., a broker-dealer.

His reason: “People 55 and up need to eliminate as much risk as possible from their retirement savings.”

If they are heavily invested in the stock market, Patton explains, they risk going through a downturn, a downsizing at work and difficulty finding new employment. So, they could be out of work at a time when their equities accounts are at their lowest in years, as with the last recession.

By contrast, when retirement savings are inside an index annuity, the boomer is assured that his or her retirement savings will be safe and will not decline, Patton says. “They also like the fact that the annuity generally yields returns that are better than CDs,” he says.

Patton does point out to clients that the upside growth in an index annuity is not guaranteed. But the fact that the product offers a guaranteed minimum return and no loss of principal is what interests older boomers, he says.

The guarantees are based on the insurance company’s ability to pay, he notes, “so I always go with high-rated insurers.”

All this has an impact on older boomers, he says. “They feel more comfortable knowing that they’ll get some return and no loss to principal.”

Patton also considers index annuities for people in their 60s, and for similar reasons–safety of principal plus the potential for better-than-CD earnings.

However, he is less inclined to offer index annuities to younger boomers, because they usually have a longer time horizon before retirement, enabling them to benefit from investing in equities. “They can take advantage of market upturns, pull out anytime they want without surrender penalties and/or wait out any market dips that occur,” he says.

The point is, if a boomer has only 10 to 15 years to go until retirement, he or she “can’t afford to be 100% invested in stocks,” stresses Brueckner.

A better approach, he says, is to use the Rule of 100 popularized by Berkshire Hathaway Chairman Warren Buffett. Take a 50-year-old boomer, as an example. This boomer probably should have 50% of retirement savings in equities, he says, and the other 50% in fixed instruments. The mix would gravitate toward a higher percentage of fixed as the client ages.

As for the fixed piece, Brueckner says he will often suggest a client put three-fifths or so of that money into an index annuity and the other two-fifths into conservatively managed mutual funds.

The heavier allocation to index annuities recognizes that boomers in their 50s are often contributing 15% of salary a year to a 401(k) or similar qualified retirement savings plan. “Most of this money is in equities,” he says.

The index annuity choice, for the other savings, helps inject safety into the overall portfolio, he says, adding that the client also gets yield potential, 10% annual liquidity (in many products), tax deferral and probate avoidance upon death.

To Jack Marrion, the real question is not whether to offer index annuities to boomers. Rather, he says, “ask whether any surrender period product is good for the boomer client.”

“If so, then ask whether a fixed or variable annuity is appropriate for that client,” continues Marrion, who is president of Advantage Compendium Ltd., St. Louis.

“My personal belief is that people should maximize any matching opportunities they have at work, in their qualified retirement savings plan, before saving outside.”

If considering the index annuity for an outside choice, the advisor can weigh several factors, Marrion adds. “If the boomer is looking for safe money resources for the additional savings, if the boomer has the necessary time frame to benefit from an index annuity, and if other competing savings sources have a lower yield, then why not take the index annuity?”

Theoretically, he adds, “index annuities do better [in yield] than bank CDs and hopefully a little better than traditional fixed annuities. So, if the surrender penalty is not a concern for the client, again, I say, why not?”

In recent months, the National Association of Securities Dealers has been waving a red flag over index annuity sales. Specifically, in its August 2005 Notice to Members 05-50, the NASD cautioned that some index annuities may be found to be securities. The self-regulatory agency therefore strongly urged its broker-dealer members to sell the products with the same supervision and compliance as applies to other securities.

Is this move causing boomers to have second thoughts about buying index annuities?

Brueckner and Patton say it is not.

Of course, many boomers don’t know about the NASD’s Notice to Members. But if a boomer does raise the question, advisors should discuss it as a turf war, Brueckner suggests. Also point out “there is not one instance of an index annuity owner losing money from market losses in this product,” he adds.

Some boomers may be temporarily thrown off by the NASD’s comments, if they hear about them, Brueckner allows. “But most also know what a turf war is,” and if the advisor discusses it directly, that can help to clear up any confusion.


Index annuities are well suited for boomers 55 and up because they “need to eliminate as much risk as possible from their retirement savings,” says one advisor.

Tips For Producers

When Talking To Boomers About Index Annuities

o Use the index annuity for the fixed part of the boomer’s portfolio. Position it as a replacement for the traditional bond portfolios that savers in previous eras have used.

==Thomas Brueckner, president of Senior Financial Planning, Nashua, N.H.

o Use index annuities with shorter–four to seven years–surrender charge periods, but remember that the period selected depends on the boomer’s time horizon. In fact, some boomers will prefer a product with a longer surrender period (10 years or more) if they think they can get a higher return.

==Troy Patton, Fiducial Investment Advisors Inc., Indianapolis

o Work with, rather than resist, boomers who come to the interview armed with research they’ve done on their own about index annuities. It’s often easier to talk with these clients about the product’s pros and cons when they already have some familiarity with it.

==Troy Patton, Fiducial Investment Advisors Inc., Indianapolis


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