If you’d suggested that a retired client consider purchasing an immediate annuity a few years ago, it’s likely your advice would have gone unheeded. After all, who wants to give up control of their money for a modest guaranteed return when the investment markets are producing high returns?
Today, that suggestion is likely to catch your clients’ attention. Depleted investment portfolios, reduced dividend payouts, and low interest rates have created a much more challenging environment for retired income investors. Consequently, immediate annuities’ guaranteed lifetime income has become more attractive.
Industry sales figures highlight the products’ growing popularity. LIMRA International estimates that investors purchased $8 billion of fixed immediate annuities in 2008. Admittedly, that’s a small percentage of the $109.4 billion of total fixed annuity sales, but it still represents a 23 percent increase over 2007′s total sales of $6.5 billion.
Bryan Place, CFP, CLU, ChFC, is an advisor with Place Financial in Manlius, N.Y. and president of AnnuityQuickQuote (www.annuityquickquote.com), an agency and Web service that sells immediate annuities. He attributes the surge in interest to investors’ flight to safety.
“When people are afraid, they want to know, at a minimum, that their guaranteed income is safe,” says Place. “The money that they need to pay their groceries, pay their rent, pay the utility bills, they want to know that they don’t have to worry about the stock market’s performance for that specific check.”
Place has identified three primary groups of immediate-annuity buyers. The first group is comprised of investors who gave up on the market in late 2008 and have decided to forgo the markets and invest for guaranteed income. The second group already had decided to avoid volatile investment and is adding to their guaranteed positions.
Group number three is motivated by necessity. “I think the third group of people [includes] the people that had to annuitize,” says Place. “Their withdrawal rate was getting so substantial that they couldn’t afford to stay in the market any longer. They had to annuitize, get the largest payout and give up on things like inheritance, leaving a legacy. Those are no longer options any more. They have to make sure that they are taking care of themselves.”
Immediate annuities can work for conservative investors who require a slightly higher withdrawal rate than could be sustained through market withdrawals, says Place. By covering their fixed expenses with the immediate annuity, investors can then allocate their remaining funds to more volatile, growth-oriented investments.
That approach provides another benefit, as well: It helps reduce investor anxiety and maintain a longer-term perspective, because the investor knows the immediate annuity will cover his fixed expenses.
Pace recognizes that many advisors and clients continue to overlook immediate annuities. Advisor compensation for these products is small, and clients dislike the loss of liquidity with immediate annuities.
The latter condition is changing, however, says Place: “There are a number of companies that do have liquidity features built into the products. They have the ability to add other provisions that might make clients feel much more comfortable about giving up control of a portion of their income.”