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September 03, 2006 at 04:00 PM
Product developers and marketers have identified what is commonly referred to as the Affluent segment of pre-retirement consumers (see chart). These are the 2nd tier of baby boomers, based on income, assets, and net worth, ranking just below the top tier, the Upper Affluent.
The Affluent represent 15% of boomer households and, for financial advisors and companies, they are in the retirement income product “sweet spot.”
How so? This segment represents a relatively large number of households with significant assets, and a relatively homogenous set of needs for retirement income products and services. The Affluent are also more likely to place a high value on the guarantee features inherent in many new products and features than are the Upper Affluent.
As many researchers have observed, accumulating sufficient retirement funds is a significant task, but that addresses only the first half of the retirement preparedness challenge. Developing a strategy to assure that the funds provide a lifetime income for planned and unplanned expenditures is the new primary task for those households that are in the “sweet spot.”
Only annuities can provide a lifetime income guarantee, and their use can reduce the amount of assets needed to provide a secure retirement. Here are some of the new products and solutions that are becoming available for this purpose:
Guaranteed living benefits. Whether available on variable annuities, index annuities, or fixed annuities, guaranteed lifetime withdrawal benefits features provide a lifetime income floor while still allowing flexible control of the assets.
With a VA, this allows continued investment of the assets in a fashion that has the potential to more than cover the amount of the withdrawals. Adding an inflation adjustment to the withdrawal limit can improve the fit even better. The unique characteristic of GLWBs is that they provide “investment protection denominated in longevity protection.”
Guaranteed minimum income benefits. These features are structured to address retirement income needs directly. Current guarantees are oriented to investment protection, but a strengthening of the guarantees could move the focus more strongly to retirement income planning.
Annuitization. Yes, due to several new product offerings, the “A” word is no longer the anathema to financial advisors and consumers that it once was.
Whether single premium or multiple premiums, and whether an immediate or deferred start, annuitization is increasingly understood as the feature that provides “longevity insurance.”
It also reduces the amount of assets needed for retirement. That is because the structured conversion of principal into income inherent in annuitization maximizes income and reduces or eliminates the need for contingency funds for adverse investment results.
