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June 21, 2012 at 08:57 AM
As an agent who has worked with hundreds of clients to help them build and protect their retirement nest eggs, I am now faced with helping my clients make the dramatic shift from the wealth management phase (gathering and growing assets) to the income management phase (preserving and distributing assets). With 78 million baby boomers racing toward—or already in—retirement, the need for retirement income protection has never been greater.
It’s been well documented that since Jan 1, 2011, about 10,000 baby boomers have and will continue to turn 65 each day. This demographic phenomenon forces our industry to be the catalyst in moving clients’ mindset from accumulation to income distribution strategies. Our retiree clients now need to draw down their assets to generate a reliable, secure income stream that will allow them to maintain the lifestyle they so desire during their retirement years.
With the latest gyrations in the stock market, historically low interest rates and the economic turmoil here and abroad still fresh in their minds; clients are looking for less risky solutions to creating a secure retirement income combined with growth potential. Those clients nearing or in retirement can’t afford to weather another pullback in the market as was experienced several years ago. They just don’t have the time horizon or risk tolerance to recover unless they want to continue working throughout their retirement. In addition to market shifts, we are dealing with traditional safe money alternatives, such as CDs, money market funds and saving accounts, that may be out of favor due to these low rates.
Fixed indexed annuities as a solution
All of these forces—demographic and economic—pose an interesting challenge to agents. The major risks facing senior clients today are:
- Market risk—The ongoing volatility in the stock market
- Inflation risk—The erosion of one’s purchasing power
- Longevity risk—The increase in life expectancy
The average individual’s lifespan has increased markedly over the last 50 years, and people now have to worry about running out of money before they run out of time.
A product solution to mitigate these risks that I’ve incorporated in my practice is the fixed indexed annuity. Since their introduction in 1995, indexed annuities have given people the opportunity to participate in the upside of being linked to an index, such as the S&P 500, without having to worry about losing money. Clients are very receptive to the dual nature of this product, which, at its core, is an insurance contract. They get the opportunity to partake in the upside potential of the stock market, with the guarantee they won’t lose money. In addition, over the years, these products have performed as they were designed to.
A challenge, however, in today’s marketplace is that the caps and participation rates, which are modifiers used to calculate the returns on these products, are around the guaranteed minimums for new business. The role of the agent is to help the client take all these interest rates into consideration when looking at these products. When interest rates begin to creep up, so will the caps and participation rates. It’s also important to remember that the fixed indexed annuity is designed to try to achieve a better rate of return than other fixed savings vehicles like CDs, money market accounts and traditional fixed annuities.
Annuity laddering as a retirement income strategy
