Mitigating the longevity risk

A fixed annuity can help fight what’s becoming the greatest impediment to a successful retirement – increasing longevity. According to Drs. David Babbell and Craig Merrill of the Wharton Financial Institutions Center and co-authors of the report, Investing Your Lump Sum at Retirement, “living too long is becoming the major financial risk of the 21st century.” The report also notes that “when considered together with decreasing bond yields and lower stock returns, these forces spell disaster for those who do not take more prudent financial measures,” i.e., utilize a fixed annuity.

Fixed annuities also offer a way to preserve an employer-sponsored retirement-plan rollover and lock-in a guaranteed interest rate. There are no annual contribution or income limits. A fixed annuity could be a good option for those wishing to increase their tax-deferred savings. So if fixed annuities remain great problem solvers, what’s not to like? It depends on which senior advisor you ask.

“I don’t sell them because interest rates are too low and I don’t like working with ‘teaser rates’,” said a New York-area financial advisor who asked not to be identified. “They can be misleading to a client which can create future problems. You’ve got to be careful which provider you use.”

“Advisors may be uncertain whether to recommend a fixed-immediate annuity in the current, low-interest rate environment,” notes Michael Gallo, senior vice president of New York Life Insurance Company. However, some fixed annuities give policyholders the best of both worlds: the ability to secure guaranteed lifetime income and potentially benefit from higher future interest rates. Policyholders selecting such income-enhancement options understand that while their guaranteed payments can increase when interest rates rise, their payments will never decrease, no matter how low interest rates decline.

“One of the biggest challenges currently facing the annuity industry is consumer education,” says Eric Thomes, senior vice president of sales for Allianz Life Insurance Co. “This could clear up some common misperceptions about fees, surrender charges and the overall role annuities can play in retirement income. Consumers have a much better understanding of Certificates of Deposit, mutual funds, stocks and bonds than they do annuities, which hampers their ability to take advantage of the benefits from annuities.”