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The innovative annuity product that offers low-risk growth

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Americans with a large nest egg are feeling protective of their precious retirement savings in these post-recession days.

That’s according to a recent survey by Allianz Life. With the unpleasant memory of 2008’s steep market losses still in mind, high-net-worth investors say they’re looking for protection as they scan the horizon for an alternate place to put their money.

Of the 1,000 respondents polled by Allianz Life — individuals over age 25 with $250,000-plus in investible assets — 82 percent say they would be more comfortable investing if they knew there was some protection against loss. Furthermore, over half (70 percent) would be willing to give up some financial gain to better protect their retirement assets.

Most investors surveyed own individual retirement accounts (81 percent), mutual funds (65 percent) or individual stocks (58 percent), and participate in 401(k) plans (57 percent). The challenge for financial professionals is to motivate these investors to build their retirement portfolio so that no assets are idle and their portfolio accurately reflects their risk tolerance.

Given that 75 percent of these investors have a financial professional or have previously used one, advisors can better motivate them to invest appropriately by understanding their concerns and fears about market loss.

It’s clear that many among the high-net-worth are still concerned about sustaining major market losses as they plan for retirement. Because many of them have already experienced a down market, these investors sense where on the downward trajectory they would feel uncomfortable with market loss. On average, they would:

  • remain calm about losing 16 percent,

  • start feeling uncomfortable at 23 percent market loss, and

  • consider pulling money out of the market at 31 percent loss.

Note: This group is not completely risk-averse. In fact, 84 percent agree that taking on risk is part of the investment game. But the uncertainty of the market continues to make many of them nervous. Their reasons for not investing include:

  • fear of market uncertainty (38 percent),

  • low interest rates (36 percent),

  • the potential for losing everything (31 percent), and

  • a lack of retirement products that offer protection from loss along with some growth potential (25 percent).

Motivating hesitant clients to invest

For today’s financial professional, the appeal of helping high-net-worth clients accumulate assets for retirement and reducing the risk of loss is compelling. Financial products, including annuities, are one option advisors should consider for their clients.

A new type of variable annuity is of particular relevance to high-net-worth investors: the index variable annuity (IVA). IVAs may offer traditional variable options and growth potential with an indexing feature that includes protection not found in traditional variable annuities.

The first IVA was marketed in 2010, and by 2014, the market had already grown to over $1 billion. This product segment continues to expand as more companies bring IVAs to market, confirming consumer demand for this product category.

The mechanics of an IVA are straightforward: There is a trade-off between potential growth and protection. Positive index returns are credited up to a specified limit (a cap) over a specific time period. If there is an index loss, varied product options offer some protection.

One option has the insurer absorbing a specified portion of the loss (a buffer) before the investor experiences any losses. Using an alternate option, the investor absorbs a specific portion of the loss (called a floor) and then the insurer covers the remaining loss.

As more consumers seek to balance their desire for growth with their risk tolerance, the demand for retirement solutions, like IVAs, will likely continue to increase. Like all annuities, the appeal is even stronger when an IVA’s death benefit and tax provisions are considered. In working with clients who are still feeling stung by the 2008 market crash and are hesitant to invest, you may find an IVA to be can get them off the sidelines and help them feel more prepared for retirement.

See also:

The FIA sales pitch

5 FIA facts to communicate to prospects

Demand growing for fixed indexed annuities

Demographics are key: Who’s most likely to be receptive to the FIA message