Think of annuities as only an old person’s product? Think again.
During a webcast held yesterday morning, appropriately titled, “Not Your Grandfather’s Annuity: Why Fixed Index Annuities Make Sense in Today’s Low-Interest Environment,” Eric Taylor, vice president and national sales manager, annuity sales, at Genworth Financial, and Kim O’Brien, executive director of the National Association of Fixed Annuities (NAFA), both spoke of younger people’s growing interest in the product.
In fact, O’Brien recalled how her 30-year-old niece recently said that she wanted to know more about the fixed indexed annuities. “It’s starting to hit younger people,” she said.
Taylor said the product’s target market is skewing younger, from the traditional consumer in their early 60s, to those in their mid-to-late-50s.
In the opening of the webcast, the duo elaborated on why consumers of any age would find a fixed indexed annuity an attractive investment option. These trends have been documented by numerous studies on the future of retirement in the U.S. that detail the market forces and demographics at work.
Years of market volatility and low interest rates have led people to seek a vehicle that acts as a buffer against stock market gyrations; guarantees an income stream in retirement; and provides a measure of growth beyond other safe money alternatives like a CD. “A fixed indexed annuity can do that,” Taylor said.
At the same time, that collective mindset has collided with a dramatic drop in the number of people getting retirement income from a traditional employer defined-benefit (DB) plan. And that includes the tidal wave of baby boomers hitting retirement age.
Back in 1983, there were about 180,000 defined benefit plans in the U.S. In 2010, that number has fallen to less than 20,000. According to O’Brien, by 2013, DB plans will tally between 15,000 and 10,000. “They’ve gone away almost completely,” she said.
Instead, most employees utilize a defined contribution (DC) plan, like a 401(k). Not only does this put the burden of securing retirement income on the individual, but since the 2008 financial crisis, many employers have scaled back their matching contributions to DC plans, O’Brien pointed out.
O’Brien said that her organization is meeting with officials at the federal level to streamline the process by which an employee can purchase an annuity in a 401(k) or other employer-sponsored retirement plan. She further said that intense regulation has made for a stronger product for the public.
Meanwhile, future retirees can expect much less of their retirement income to come from Social Security. Today, a retiree will derive about 55 percent of their retirement income from Social Security as opposed to 90 percent when previous generations retired, O’Brien said. “That’s a huge make-up,” she said.
These changes to how Americans fund their retirements are also occurring concurrently with an increase in longevity. People are living longer and therefore, need more funds to secure what they believe will be a more active lifestyle in their golden years, Taylor said.
Not surprisingly, since they work in the field, both Taylor and O’Brien said that fixed index annuities are one instrument that can aid people in locking in a steady income stream in retirement. Both noted that sales of the product have increased.
Apparently, the public needs help in doing just that. Taylor cited a Genworth study that found that 71 percent of respondents did not have a written retirement plan. He said that advisors need to talk to their clients about this option to see if it is a fit.
Fixed index annuities, Taylor noted, have undergone several product innovations such as new crediting strategies that provide growth and the ability to take income when the policyholder actually needs it. He also said that Genworth is getting to launch a product that offers the policyholder the option to gain 10 percent to 10.5 percent growth in two years.