There’s a simple way to get more 401(k) participants to buy annuities: remember that most participants are not financial analysts. Most are “the rest of us,” or TROUs in this discussion.
TROUs range from the slightly math averse to borderline innumerates. They appreciate restaurant bills showing suggested gratuities, and retail displays showing 35%-off pricing as “today” versus “regularly.”
This doesn’t mean TROUs aren’t smart. They just don’t process numbers the way financial experts do. Annuity sellers who want TROUs as clients and customers approach TROUS accordingly. If they don’t, they’ll miss out on a sizeable potential customer base.
Simply put, most TROUs are clueless about annuities. That’s why they don’t call. So, trying to “sell” annuities to them–in the traditional meaning of selling–is often a waste of time.
A better approach is to help them “discover” annuities. That uncovers their need and desire to buy.
The key is to present ideas in ways TROUs immediately understand. For example, they understand shopping. So why not present the financial aspects of retirement as the same as other purchases?
Here’s how: start by helping TROUs discover what retirement financial lifestyle they want to purchase. Give them a clear and easy way to estimate the price of that lifestyle. Then, help them find the discounts. Finally, let them see the value of a lifetime guarantee.
Rather than telling them how much to spend each year and how long they’ll need it, involve TROUs in discovering those amounts. Ask big-picture questions like, do you want to live in a bungalow or a fancy beach condo? Stay where you are or on cruise ships? Stop working as soon as possible or keep going as long as you can? Spend more, the same or less than now?
Use the answers to show how the ‘retail price’ is set. Here’s an example:
“You said you’d like to spend $40,000 a year, maybe for 25 years–from age 65 to 90. To get your estimated retail price, we’ll simply multiply $40,000 times 25 years … that’s (pause) $1,000,000.”
Expect to hear, “Wow! No one ever explained it like that before.”
This simple approach helps TROUs discover the impact and risk of longevity.
Next, say: “I’ve got some good news. You don’t have to pay the retail price. You can buy your retirement at a big discount.
“From the ‘retail price,’ subtract the amounts you expect to receive from various sources during retirement–Social Security, pensions, 401(k)s, etc. For income benefits, multiply the annual benefit times the number of expected years you’ll need the income. If you plan future part-time work, add up the income you think you’ll earn in retirement and subtract it from the ‘retail price.’”
Yes, important points haven’t been raised yet (inflation, taxes, health care, etc.). But you’re keeping it simple, helping TROUs see the big picture. You’ll get more detailed later. The point is, it’s better when TROUs are engaged in the conversation, not just listening to you recount facts they’re not yet motivated to learn.
In most cases, the amounts paid (the ‘discounts’) won’t cover the ‘retail price.’ Some choices are clear. Lower the price, work longer, or both.
Here’s where you can offer a way to make the 401(k) balance go further for 65-year-old man. “To help close that gap, you can put $100,000 from your 401(k) an annuity paying around $7,800 a year for life. That’s $195,000 over 25 years, more if you live longer.
“Would you like to dig deeper? I’ve got a computer program that gets more detailed.”
Due to naivety, most TROUs would not consider giving up a large $100,000 lump sum for a small monthly income for life of around $650. That is, they wouldn’t consider it unless you help them discover the real value of a lump sum by showing it in light of 25 years of retirement.
“Let’s say you move $100,000 from your 401(k) into an IRA held at a bank to get FDIC insurance. Assuming interest and inflation rates are the same, when you divide $100,000 by 25 years, that’s $4,000 a year–only $334 a month in buying power, after which your account is $0.
“But what if you used your $100,000 to purchase an annuity?” You know how to tell the rest of this story.
TROUs often believe that with stocks averaging around 10% growth over many years, they can withdraw 10% each year without touching the balance. Bursting this myth is tough. Sometimes, dividing a lump sum by 25 years helps.
This consumer-oriented approach is intended to get TROUs involved in learning about choices at retirement. It’s a start, not the end.
Dennis R. Ackley is principal of Ackley Associates and a specialist in consumer-oriented retirement education, based in Lee’s Summit, Mo. His e-mail is firstname.lastname@example.org