With the choppy economy and annuity critics seemingly popping out of the woodwork, what motivates boomers buy annuities?
After all, there are plenty of choices–bank certificates of deposit, stocks, bonds, mutual funds, managed accounts and more.
The motivator is the product that best meets the boomer’s need, particularly where retirement income is concerned, say industry sources.
Annuities have had bad press in years past, allows Greg Reynholds, vice president-asset management for Lenox Advisors, Inc., a New York firm specializing in the high net worth market.
But the guarantee features added to annuities in recent years–such as guaranteed income riders–have created incentives for boomers to look at annuities for a portion of their portfolio, he says. They use the products to meet retirement income needs, he says.
His firm does a lot of client education around the financial and retirement plan and about the various products that can be used to meet plan objectives, Reynholds points out. The recommended allocation is generally for 5%-10% to go into annuities, primarily variable annuities with guaranteed living benefits.
That’s assuming the annuity fits the client’s overall strategy, he stresses.
“We don’t want clients to be in a situation where, when they retire, they find 50% of their net worth has been erased,” due to a market drop, for example. A VA’s guaranteed floor on income payouts addresses that concern, he notes.
The guarantees open up another motivator for boomers, he indicates. “Boomers can invest more aggressively, because they know their income is guaranteed.”
People do tend to become more conservative as they age, Reynholds allows. “But if you’re going to live 30 or 40 years in retirement, you can’t be so conservative.”
Boomers could opt for other conservative choices, like Treasury bills, CDs and bonds, he says. “But then you run the risk of not outpacing inflation, or even keeping up with inflation.” He says his firm educates on these points, and boomers do agree with the recommendations.
“Some boomers don’t want to put money into any investment, when the market is down,” points out Laura Harris, principal of Laura Harris Agency, Inc., Corpus Christi, Texas. And, as they grow older, they become more risk averse, she says.
So she too takes a client education approach, first checking out the boomer’s risk tolerance. For instance, she will ask boomers to specify, on a scale of 1-10, if they want to have 100% security or to take lots of risk.
Those in the 1-3 range usually want safe money options, she indicates. Often, these boomers will have CDs, she says, noting that “they like the FDIC guarantee, even if it pays a ridiculously low rate.”
Depending on the plan and objectives, she continues, she might offer them a fixed annuity. Once she shows how the annuity compares to CDs–better interest rate, tax deferral, etc.–she says she encounters “few, if any” objections to moving some of the money into an annuity.
For those in the 7-10 range, Harris might suggest a VA with income guarantee and also a guaranteed return.
As they age, she observes, boomers become increasingly concerned about outliving their funds. Many who are near or at retirement still have CDs, she says, noting this is often “because they don’t know what else to do with their money, or because grandpa suggested they put the money there” for the FDIC guarantee.
In many cases, she notes, “the most education these boomers have had on retirement income is from the retirement program at work.”
So she educates these boomers, “like a teacher,” about retirement. She uses a chart depicting today’s retirement realities (declining traditional pensions, Social Security uncertainties, etc.) to help them see what is happening.
The message she delivers is: “You’re personally responsible for your retirement; it’s crucial that you be proactively involved in planning for it.”
Getting to specifics, she urges employed boomers to put money into their 401(k), at least up to the employer match and to the maximum allowed if possible. “It’s in their best interest for me to do this,” she says. “It also helps build trust with the client.”
She also discusses various solutions for income needs, not just annuities.