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October 13, 2015 at 03:36 AM
The sharing economy.
It’s a new phrase built on old ideas: that sharing resources makes a lot of sense, saves people money and is generally good for society.
An example of the sharing economy in action? Airbnb: a booming platform for sharing or renting short-term dwelling around the globe. The sharing economy is also evident in the growing popularity of Uber, Zipcar, Kickstarter, Waze, food cooperatives and collaborative workspaces.
New ways for individuals to optimize shared resources are emerging faster than you can say UberPool. Believe it or not, income annuities – annuities that give individuals a paycheck for life in exchange for one or more premium payments – are a pretty critical part of the sharing economy too, especially for retirees.
Surprised? Finance professor and retirement author Moshe Milevsky has likened annuities to an old sharing economy idea, the tontine, for years.
But we think a modern take on how income annuities are built around sharing is just the conversation starter you need.
Studies show that we remember stories much more than we do data. And when story and data are used together, your message becomes that much more powerful.
Using a relevant analogy to explain how income annuities work could be the key to helping your clients see how annuities might fit into their retirement income strategy.
Eyebrow still raised? Here are four ways income annuities are the retirement equivalent of Airbnb.
1) It’s built on pooled resources.
If you’re familiar with Airbnb, you know that the more homes listed in a particular city, the more likely you are to get a good deal. Think of Airbnb’s inventory in a particular city or the number of UberX’s available after a concert as the pool of resources. The more shared resources, the better. An income annuity works in a similar way when it comes to retirement income.
Consider this hypothetical scenario: you’ve just retired and have $1 million earmarked for your retirement income. You can withdraw a modest 3.5 percent from that $1 million each year – or roughly $35,000. Or, you can get $63,000 a year by purchasing an income annuity1. Which would you rather? The catch? You can only be promised the $63,000 a year if many others decide to purchase an income annuity too. You see, you’ve got to pool your money with others’ in order for it to pay this amount for the rest of your life – no matter how long you live.
It’s the insurer’s job to bring people into the pool, make actuarial assumptions about how long everyone in the pool is going to live and assumptions about how much the pooled money will earn, and promise a payout that accounts for some people living longer and others living shorter than expected. By pooling mortality risk and investment risk, everyone wins.
