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.
2) It’s built on trust.
There’s a lot to be said for staying in a complete stranger’s home or letting a stranger stay in yours. Trust is what makes Airbnb work. The shared resource model works so well because there’s an inherent trust and integrity common between both parties in the deal, and the intermediary that facilitates the sharing provides some additional insurance.
Similarly, trust, transparency, and integrity is essential to an income annuity purchase, too. A stream of income that is guaranteed for life is only as good as the company that backs that guarantee. Financial strength and the ratings awarded for that financial strength can be good indicators of whether a company can be trusted to meet their financial commitments, no matter what.
3) User experience matters.
Arguably, what’s helped Airbnb take off is its simple, straightforward user experience.
If you see a space that clearly meets your needs, you’re likely to book quickly and feel confident when you arrive. In the same vein, the simpler it is to understand how a financial product like an annuity fits your retirement needs, the easier it is to buy. Income annuities are a simple, straightforward promise of guaranteed income for life. No out of pocket fees, no changing rates, and no guesswork.
Retirees have a lot of options when it comes to their retirement income, many of which offer a plethora of options and riders. A simple user experience – not unlike how easy it is to book Airbnb – is best when it comes to retirement income.
4) It’s easy to get hooked.
I know people who won’t stay in hotels anymore because Airbnb better fits their needs: it’s straightforward, convenient, and often cheaper.
Annuity owners aren’t much different. They tend to be very happy with their purchase and often buy more than one annuity. 42 percent of annuity owners in a recent Deloitte Center for Financial Services study reported already owning an annuity prior to their most recent purchase. And of those repeat buyers, three-quarters purchased an additional annuity (rather than replaced their existing one). The same Deloitte survey said that more than half of respondents were “very satisfied with nearly all aspects of their annuity purchase, while only a handful described themselves as somewhat or very dissatisfied.” Talk to your clients who own an income annuity.
Like fans of Airbnb, Uber, and others, they’re likely hooked and happy to talk about what they love most about their income annuity. Chances are they’ll be a fan of its steady, predictable income and the fact that despite market ups and downs they won’t have to worry about losing money or outliving their savings. They are also more likely to be interested in adding to their guaranteed income. It’s worth the conversation – you may uncover more assets or learn about new ways to talk to your other retirement age clients about guaranteed income.
Are your clients using services like Airbnb and Uber? Probably. Are you helping them leverage the sharing economy to bolster their retirements? If not, sometimes relatable experiences like the ones they have with these companies is the perfect introduction. It’s an unexpected comparison that will make you more memorable.
Keep the conversation going by emailing me at AnnuityBlog@newyorklife.com. I’d love to hear what you think about this topic.
1 Income annuity payout based on rates for a New York Life Guaranteed Lifetime Income Annuity purchased by a 70 year old male with a $1 million premium electing a Cash Refund payout option as of 8/31/15. Issued by New York Life Insurance and Annuity Corporation (NYLIAC), 51 Madison Avenue, New York, NY 10010. Subject to claims paying ability of NYLIAC. Available in jurisdictions where approved. This article is for general informational purposes only and represents the views and opinions of its author, who is solely responsible for its content. Individuals should evaluate their own personal needs before making decisions regarding their financial situation. Annuities are longer term insurance products used for retirement and other planning purposes.