An annuity with boomers in mind

Neither, however, may be desirable to many boomer clients, given their stage of life and the present macro environment. With portfolios battered by, and barely recovering from, two stock market crashes in less than a decade, boomers in or approaching the early years of retirement continue to need income growth potential yet cannot afford to sacrifice principal protection for growth. This need for growth, combined with the relative illiquidity of income annuities, may make DIAs and SPIAs a difficult sell to boomers. Variable annuities, however, may be too volatile for these clients and provide too little guaranteed income.

Spanning the gap between these two product groups is a new generation of fixed indexed annuities (FIAs) with riders that guarantee lifetime income. Like DIAs, FIAs guarantee specific future payout levels that (generally) are higher than those guaranteed by variable annuities. Like variable annuities, the account values in FIAs are accessible and provide the potential for increasing account values and future payouts over time — in the case of FIAs, via crediting options linked to performance of a financial market index and, in most FIAs, a fixed account option as well.

Perhaps most importantly for boomer clients, contemporary FIAs with guaranteed living benefits entail little to no market-related tail risk (as compared to variable annuities). The bulk of the premiums are invested in the insurer’s general account, which gives the insurer greater control over the assets and makes account values less volatile. Only a small portion of premiums is exposed to the equity market, so the insurer’s hedging efforts are centered more on longevity risk, which is predictable with a fair degree of accuracy, and less on market risk, which can be highly unpredictable. Easily estimated by actuaries, longevity risk is less costly to manage, and the cost savings can be passed along to consumers in the form of more attractive and/or lower-cost benefits, including lifetime guarantees.

A more complete solution set

Recent modifications are returning variable annuities to their originally intended use as liquid vehicles for accumulating retirement assets. The income annuities continue to offer a much needed choice for principal protection and a generally higher guaranteed income once clients enter the payout/asset drawdown phase of retirement. And the advent of FIAs with lower costs and stronger lifetime benefits is a timely and appropriate response for the large cohort of boomers who stand somewhere between asset building and asset spending. Given the size of the boomer market and the number of years till the last of them are firmly entrenched in the decumulation phase, FIAs deserve consideration in many advisors’ solution sets.

See also:

• How the recession has changed retirement planning
• Delving into the ascendance of FIAs
• Extreme makeover: Variable annuity edition