The image makeover that annuities have undergone of late is enough to make Anthony Weiner envious—and to make advisors such as Christine Proulx take notice.
“They’re not the devil anymore” in the eyes of the investing public, observes Proulx, founder and president of Proulx Insurance & Financial Services in Kingfield, Maine.
Indeed, quite the opposite. The recent surge in demand for annuities—particularly fixed index, immediate and deferred income products (see the sidebar on page XX for figures documenting the sales uptick)—suggests the retirement-minded public clearly views these products as a godsend for the features they offer to protect a retirement nest egg against longevity risk, loss of principal (with fixed products), inflation, market volatility, and spend-down from an expensive long-term care event.
An annuity’s lifetime income guarantee (typically packaged as a rider available with variable and fixed index products) also protects clients in the event their drawdown strategy falls short of expectations. For example, as the authors of The 4 Percent Rule Is Not Safe in a Low-Yield World point out in their 2013 Journal of Financial Planning paper, in today’s environment, the legitimacy of the 4 percent initial withdrawal strategy for retirement income “may be a historical anomaly, and clients may wish to consider their retirement income strategies more broadly than relying solely on systematic withdrawals from a volatile portfolio.”
While annuity products and features needs aren’t a retirement income panacea, Proulx and a growing contingent of other advisors are scripting a key role for annuities in the retirement income strategies they craft for clients.
For Stan Haithcock, aka Stan the Annuity Man, an annuity-focused advisor based in Ponte Vedra, Fla., the primary role for annuities in the context of a retirement income strategy is to transfer those aforementioned risks to the insurance company underwriting the contract. “I don’t think they’re market growth products,” he says. “Annuities, to me, solve for lifestyle.”
“An annuity is just another piece of the [retirement income] puzzle,” echoes Rick Bindler, AIF, director of retirement plan solutions at Partners Wealth Management in Naperville, Ill. As such, they’re most effectively used in tandem with a pension or retirement plan, Social Security and perhaps other vehicles that produce income, such as investments in alternative asset classes like REITs and limited partnerships, adds Joe Lucey, RFC, president of Secured Retirement Advisors in St. Louis Park, Minn.
When a pension or retirement plan plus Social Security don’t wholly meet a client’s retirement income needs, Lucey says he looks to an annuity to bridge that gap and absorb the risks to which a retirement nest egg is vulnerable (outliving one’s savings, loss of principal, inflation, etc.). Doing so “frees the client to seek more growth and take more risk elsewhere in their portfolio.”
Why FIAs are gaining favor
“A lot of my clients want a guarantee of lifetime income,” says Proulx. “Another big concern for them is maintaining their purchasing power by having income that’s indexed to inflation.”
For them, often the best solution, she says, is a fixed indexed annuity (FIA) with riders that provide guaranteed income for life, indexed to inflation. That combination “is a great feature for a lot of retirees.” And in many cases, she notes, getting it via a fixed index annuity is preferable to getting it from a variable annuity, because of the principal protection afforded by an FIA. Fees for income guarantees also tend to be lower with FIAs, adds Lucey.
More advisors are steering clients toward riders that allow contract-holders flexibility in when they turn on the income stream, whether it’s five, 10 or more years into retirement, relying on other income sources in the interim. Riders that provide access to funds to cover limited long-term-care costs also appeal to certain clients, according to Proulx.
During a retirement income discussion with clients, whatever their priorities, it’s important to clarify that the FIA is there primarily to provide protection, not growth, says Lucey. “I think fixed index annuities should be sold against other safe assets, like CDs and money market accounts,” rather than against equity-based vehicles.
The challenge for advisors is finding the ideal combination of annuity features, at the right price, from the right insurer. Proulx says she considers only contracts from carriers rated A- or higher. Moving parts such as bonusing policies, roll-up rates, interest calculation methodologies and the like also figure prominently in the evaluation process, adds Haithcock.