Kimberly Foss calls them “tweeners.” But, no, she’s not referring to those legions of pre-teens who worship Justin Bieber. Instead of the baggy-pants one, Foss, CFP®, founder and president of Empyrion Wealth Management in Roseville, Calif., is talking about baby boomers, mostly in their 50s, who have been displaced from their jobs and are possibly entering a second career. At the same time, they are also contemplating retirement and how they will fund their golden years. “But they don’t have quite enough money for full retirement so they are looking for a way to get a guaranteed income but not take it right now,” Foss says.
Enter the latest hot product in the annuity world, the deferred income annuity, or DIA. In simplest terms, a baby boomer can buy a DIA at age 55, but not switch on the income spigot until he or she actually retires in, say, 10 years, or whatever start date a purchaser may choose.
Perhaps the best illustration of the typical DIA buyer is a 51-year-old client of Foss’s. After being downsized from her employer, she is now doing consulting work and living off taxable investments. Nevertheless, she wants to ensure a guaranteed income stream when she does fully retire. So she plowed $300,000 into a deferred income annuity that will give her a 5 percent payout beginning at age 65. “And she’ll get that for life,” Foss says.
Her client is not alone. In an otherwise muted annuity sales market, deferred income annuities are a growing, albeit still small, niche. In 2012, DIA sales reached $1 billion, according to LIMRA. In the fourth quarter, DIA sales hit $390 million, a jump of nearly 150 percent from the first quarter of last year when sales totaled $160 million.
In releasing those statistics, Joe Montminy, assistant vice president and director LIMRA annuity research, commented that more companies are entering the DIA market, hoping to target younger baby boomers between the ages of 45-59. Those consumers, he noted, collectively hold nearly $10 trillion in financial assets. “So we anticipate these products will continue to have remarkable growth,” Montminy stated.
The appeal of a deferred income annuity is that it gives the policyholder peace of mind that there will be a secure income stream (in addition to Social Security and possibly a pension) when they retire in a decade or so. In other words, they are handing over money now but won’t see any portion of those dollars until a later date. Doesn’t sound like something that would entice a generation accustomed to instant gratification, does it?
Yet if research and sales numbers are any indication, baby boomers, especially the younger boomers, appear to be getting the message that they need to start planning for their retirement, like, now. Putting together an income plan mere weeks before the golden watch dinner is no longer a workable solution.
Ross Goldstein, director of marketing in the retirement and annuity division of New York Life, says his firm’s research indicates that consumers tend to draw up their retirement blueprint roughly five years before they exit the workforce for good.
For that reason, New York Life entered the DIA market in 2011, when it launched its Guaranteed Future Income Annuity (GFIA). Earlier this year, the product surpassed $1 billion in premiums.
The average purchase age for the GFIA is 58, with an average deferral duration of nine years. (Policyholders can postpone the start of their income payments for as short a time as two years or as long as 40.)
For that typical 58-year-old who places, say, $100,000 in the annuity today, he or she could expect a 10 percent payout, or $10,000 per year for life, starting at age 67. The policy also permits an owner to switch their start date one time, Goldstein notes.
ING U.S. entered the DIA game in March with the introduction of its ING Lifetime Income single premium deferred fixed annuity. Chad Tope, president of ING U.S. Annuity and Asset Sales, relates that the “sweet spot” it’s targeting for its newest product are those consumers between 50 and 60 who are plotting their retirement about 10 years hence. There are two step-ups embedded in the contract, one in the fifth year and another in the 10th.
Another factor propelling the DIA marketplace is the money many boomers currently hold in 401(k)s. Those dollars are already earmarked for retirement, so why not turn that bankroll into a guaranteed income stream down the road? “In the deferred income marketplace today, there have been a lot of rollover assets going in those products,” Tope says.
Mark Fitzgerald, national sales manager for Saybrus Partners, concurs that what’s driving the expansion of the DIA marketplace is the tsunami of baby boomers, particularly in the middle market, now striding into retirement.
“Pension plans are less and less prominent. There’s been concerns raised around Social Security and how’s that is going to look forward,” he says. “There is a strong awareness from the consumer perspective that they need to take more control of the future of their income,”
DIAs can be structured, Fitzgerald details, as either a single premium contract or with the ability to add subsequent deposits. Utmost in a buyer’s mind is how much income they will eventually pull out of the annuity. “The growth component is geared specifically toward what the income generation is going to be versus the actual cash value,” he explains. “What [DIAs] are really designed to do is provide predictability of income in the future.”
If I should die…
But what if the policyholder passes away before the income stream begins to flow? Not to worry, DIAs can be purchased with a death benefit rider that gives heirs cash.
While they may seem like the perfect product for baby boomers, DIAs are not for everyone. Of course, someone who needs income immediately would not be well served by the product. It’s meant for a person who can postpone the income stream for at least five years.
Foss also warns that a deferred income annuity should include some sort cost of living escalation feature. “That’s a biggie in my book,” she says, “because I think inflation is coming and coming fast.”
Nevertheless, Foss contends a case could be made for everyone to set a portion of their assets into a guaranteed income product, and she includes herself in that category. “I’m 51, I put a deferred annuity together. I’m doing dollar-cost averaging. This is going to be supplemental to my income at 65 or 70.”