Retirement is the hot topic today, largely because of the oncoming wave of boomers nearing the age where they will “hang it up.” To me it hardly seems possible that many of them are approaching retirement age–it was only yesterday that, while serving on our local school board, we were building new schools to educate this same bunch. Time really does fly, and as a current retiree, I can attest that it flies even faster in retirement–seems like every other day is Friday.
Perhaps a few observations might be in order from one who has been essentially retired for 15 years and who can also look back on a long-time affiliation with the marketing of insurance products. Much of what is being written on the subject today is speculation about what is best depending upon a variety of scenarios. I will limit my own observations to what has happened rather than speculate about the future.
At the outset I would like to state that my experience in the field and otherwise is that people facing retirement are a lot more attracted to guarantees than is generally supposed. I could point to many examples of this, but one in particular comes to mind.
For a number of years my partner and I were consultants to the profit-sharing plan of a local bank. It was the most successful plan in our area and often pointed to as a great way to help employees plan for retirement. From time to time we were asked to present annuity options to retiring employees. We always presented both variable and fixed annuities–all that was available at the time.
Out of all the presentations we made, only one selected a variable annuity, all others opted for the guarantees of a fixed annuity. The one selecting the variable–I will call her Betty–was a long-time cafeteria worker who had accumulated a significant sum in her profit-sharing account. The application was completed and submitted to the insurance company with the cash. The next morning Betty showed up in my office bleary-eyed and obviously in a nervous state. She said she had not slept a wink worrying about her decision to select variable income. She asked for her money back so she could restore her piece of mind. We were able to get her money back and Betty was happy again.
Another aspect of this case is also interesting. A few months later the head of the bank’s trust department retired, I will call him Ben. He was one of the bank’s most valuable employees and had built their trust department to the best in our state. And yet, when he retired his account in the profit-sharing plan, it was less than half that of Betty’s.
The decisions made by Betty on behalf of the bank were generally limited to the size of the scoop of mashed potatoes she dispensed in the chow line every day. Ben’s decisions, on the other hand, involved millions of dollars of profit for the bank–no question as to who was the most valuable. And yet the rewards of the profit-sharing showed the opposite. Betty was a member of the plan during the early high growth days of the plan. Ben, with a shorter employment, missed out on the boom and received much less for his far more valued service. Some time after this the bank dropped the profit-sharing plan for a defined benefit plan. I suspect the example of Betty and Ben may have been the reason.
This is significant today as companies across a broad front are abandoning defined benefit plans in favor of 401(k)s. There is no question in my mind that the saga of Betty and Ben will be repeated many times over in various corporate settings. If companies can no longer afford defined benefit plans then it seems to me that a huge market in non-qualified deferred compensation should open to take care of the Bens who will be shortchanged by a 401(k).
Annuities seem to be a particular focus of financial writers, and comments are both pro and con. I have never sold some of the newer products being offered today, so I cannot speak from personal experience as to their effectiveness. Some critics have been harsh towards index annuities because of the caps on upside growth years. This, they contend, lessens the likelihood the annuity will actually track the index it is pegged to because stock prices do not rise in a straight line. Perhaps the most criticized of the lot is the immediate fixed annuity. Critics allege they disinherit heirs, cause a loss of control of assets and can even be compared to gambling on life expectancy.
A fixed annuity may be all those things, but let me tell you of my actual experience with one. In 1992 I purchased a joint and survivor annuity for Gladys and me with a 10-year period certain. I paid approximately $200,000 for the annuity. It pays us $1,918 per month or $23,025 per year. The total payout to date has been $368,402. It has never missed a monthly payment, never been late and the payment has never varied. The current replacement cost for that annuity, at our present ages, is $213,918; more than the original cost.
This annuity, and others that we own, has not cut off our heirs; rather the economic freedom it has given us has allowed us to invest in other areas that have produced an estate larger than the combined cost of all our annuities. We took risks we would not have dared to take absent the steady income from annuities. We have been very content to release control of assets within the annuities, especially as we get older, so that we can focus our attention on other opportunities.
In my view what we have done is about as far away from gambling as you can get.