Annuities could play an important role in helping members of the “Me Generation” stretch out their retirement savings.
Financial experts talked about how annuities could help boomers, and how to improve annuities to make them more attractive to boomers, here at a seminar sponsored by Barclays Global Investors, San Francisco.
“Annuities are a very undervalued product,” Olivia Mitchell, a professor of insurance and risk management at the University of Pennsylvania, told seminar attendees. “There are good ones and bad ones, but in principle, it [the product] is very important.”
Reverse mortgages could help some boomers finance their retirement, and working a few years longer than they might be expecting also could help, Mitchell said.
If Americans in the median wage quintile want to retire at age 62, they will need to save about 17% more to generate adequate retirement income, but they will need to save only 7.7% more if they retire at age 65, Mitchell said.
But Mitchell said immediate annuities also can play an important role in helping boomers get the most out of their retirement savings.
Many financial planners and advice columnists are skeptical about annuities, but critics who complain about annuity pricing are overlooking the fact that immediate annuity purchasers tend to live longer than other retirees, Mitchell said.
Simply looking at an ordinary mortality table might suggest that annuity purchasers will be getting an average return of 81 cents on the dollar, but looking at an annuity survival table shows that the real return is likely to be about 93 cents on the dollar, Mitchell said.
The baby boomers themselves tend not to understand that life expectancy represents a median figure for expected lifespan, not a maximum, according to Dallas Salisbury, president of the Employee Benefit Research Institute, Washington.
The 2002 annuity mortality table, for example, shows that males age 65 have a 50% chance of living to age 85 but also have a 25% chance of living to age 92, Salisbury said.
Speakers conceded that boomers, financial advisors and others have concerns about how well annuities will perform, especially during severe market downturns.
To persuade boomers to put retirement savings in income annuities, insurers must make the process of buying and holding annuities easy, transparent and safe, said M. Barton Waring, a managing director at Barclays.
One fundamental problem is that insurers tend to use investment book value in financial reporting rather than marking the value of investments to market, and that approach could conceal underfunding, Waring said.
Another problem is that “there are wide variations state by state” in guarantee fund guarantee levels, Waring said.
Some seminar participants said Congress has considered protecting annuity issuers and holders by setting up a Fannie Mae-type organization that would buy responsibility for annuity longevity risk from insurers and securitize it.