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April 21, 2010 at 08:00 PM
Over time, many consumers have shied away from annuities in favor of alternative investment vehicles or products with which they were more familiar, such as mutual funds and certificates of deposit. In fact, just over a year ago, these popular investments were performing well, and on paper, the account balances looked good.
Since then, however, the financial markets have suffered, and many individuals have noticed significant drops in their retirement portfolios. As a result, they have been forced to make difficult decisions about their approach to retirement investing. Financial professionals, who have also been slow to warm to annuities, now see that their clients need to protect at least a portion of their retirement savings with the guarantees that only an insurance product can provide. Guarantees are particularly important during market downturns, and cannot be found in today’s traditional investment vehicles.
In a recent MetLife poll, individuals overwhelmingly responded that they are interested in products that provide protections against market risk. The recession, combined with losses in defined contribution plans — such as 401(k) plans — and in other savings and investment vehicles, has created deep fissures in the retirement landscape. To make matters worse, the number of working individuals covered by traditional defined benefit (DB) pension plans had shrunk in February 2009 to approximately 31 percent compared with 56.7 percent 20 years ago, according to the Employee Benefit Research Institute. Today, Americans typically don’t have a guaranteed source of retirement income aside from their future Social Security benefits, meaning that the financial burden has been placed on the individual to generate enough income to last throughout retirement.
Unfortunately, many discover too late that their “bag of cash” is not enough to last through retirement and cover their needs and wants. This can be especially true after the recent market meltdown. However, there are ways you can help clients create their own version of a personal pension plan using income annuities.
A flock to guarantees
Total fixed annuity sales in particular have increased significantly: Sales grew to $28.6 billion, an 11 percent increase from the second quarter of 2008, and year-to-date, sales totaled hit $64.2 billion, a 39 percent increase year-to-date. In addition, the percentage of retirees describing themselves as “conservative” increased from 53 percent in 2008 to 70 percent in 2009.
Like traditional DB pension plans, fixed income annuities are designed to provide guaranteed consistent payments that won’t change, even with market fluctuations. And like any solid retirement plan, they can help pay for fixed monthly expenses using the most efficient, reliable income available.
Individuals must first look at their annual fixed costs such as food, housing, medical, and insurance expenses and decide how much money it will take to cover those items. Then, they’ll need to take into account any future regular income, such as Social Security. Any gap — which would have previously been filled by a DB pension plan — could be filled today by an income annuity, so the client can be comforted by the fact that their monthly expenses are covered. But clients should also consider keeping some of their savings liquid for emergencies, and might also want to keep other assets invested for growth to combat inflation.
Income now, or later?
Most consumers cannot sustain a comfortable living through retirement with only one or two investments in traditional product classes, such as mutual funds and money market accounts. On investments without lifetime guarantees, the risk of depletion due to longevity is just too high.
