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Lifetime Income: It’s a Relay, Not a Sprint

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American Equity understands your clients look to you to help them find the retirement solutions that are in their best interest. While every retirement is unique, we also believe many of today’s pre-retirees and retirees face the same concerns: preserving money, maintaining a lifestyle they enjoy, and securing a lifelong income.

American Equity has created a six-part series, comprising monthly articles and infographics, addressing common retirement concerns.

So far, we covered:

Our next entry in the series focuses on the importance of lifetime income and longevity concerns.

It’s a Relay, Not a Sprint

The 4×100-meter relay is a perennial Olympic favorite. From the track to the pool, Usain Bolt to Michael Phelps, some of The Games’ most memorable recent moments have played out in a relay. Each leg, a team member plies his skillset to prepare the next member for success. By working in concert they supersede the abilities any single individual— after all, the 4×100-meter relay world record is six seconds faster than the 400-meter dash. 

A sound retirement strategy resembles a relay. Each phase, or leg, requires its own approach, relying on specific products and methods best suited to build a sound foundation for guaranteed income. Within the last decade, fixed index annuities have proven to be a reliable leg in a comprehensive retirement plan. This year marks the ninth consecutive year of fixed index annuity sales growth.1

The Anchor Leg—The Income Rider

However, with more than 70 million baby boomers aging through retirement, many are looking for a diversified strategy that can safeguard a lifetime income source beyond annuitization. In a relay, the last leg is known as the anchor—it is often given to the most dependable team member. In recent years, the income rider has become that reliable component of a comprehensive approach, providing assurance against some of retirees’ biggest lifetime income fears.

Lifetime Income Fears

The Indexed Annuity Leadership Council recently reported that the biggest fears facing 50 percent of Americans is outliving their income or the inability to maintain their current lifestyle.2 An additional 19 percent fear health care costs.

Longevity and savings trends indicate their fears may be warranted. Recent reports indicate the baby boomer generation faces longer retirements, funded by limited, unpredictable income.

Lifetime Income Factors

  • Male and Female Lifespan: the average 65 year old male today, is expected to live to 83; the average 65 year old female is expected to live to 85.2 years.3
  • Longevity: one out of every 10 Americans 65 years old today, will live past age 95.3
  • Income Gap: the nation’s Retirement Income Deficit is $7.7 trillion.4 

When considering factors such as ever-increasing longevity, market volatility, cost of living, long-term care expenses, et al., it is understandable why more and more agents find income riders to be a sound measure for protecting their client’s best interests. In 2016, a surge of new income rider riders attached to fixed annuities propelled the segment to a record $117.4 billion.1

Of course, every client’s income needs are unique and assessing those demands will help determine what benefits are right for them. Whether they are looking for additional income for health care associated costs or joint payouts to a spouse, one of the most important matters is explaining how the rider works with the annuity and how much their guaranteed benefits cost.

Fees Matter

The peace of mind afforded by guaranteed lifetime income does come at a cost. This is why transparent design is essential when evaluating a lifelong income product. Otherwise, factors such as income rider fees can end up costing clients more than the value of their benefits.

For example, many of the top carriers offer comparable annual fees on their riders, but how that fee is calculated makes a big difference. Often a carrier applies the annual rider fee to the income account value instead of the actual contract value. The income account value is a higher number that the insurance carrier uses to calculate a future payout rate—it is not real dollars that are accessible for withdrawal. The result is rapidly increasing annual fees that quickly deplete the actual contract value. Whereas carriers that use the contract value provide consistent, straight-forward fee calculations resulting in predictable lifetime returns.

Big Decisions Need Sound Solutions

Retirement is often one of the biggest financial decisions a person will make. It is also one fraught with varied risk and uncertainty. Clients turn to financial professionals for sound solutions and assurance. There are few retirement vehicles better suited to help protect against their concern for lifetime income than the fixed index annuity and income rider. 

Works cited:

1 LIMRA Secure Retirement Institute’s 2016 Fourth Quarter U.S. Annuity Sales survey

2 Indexed Annuity Leadership Council Retirement Survey, 2016

3 Social Security Administration

4 Center for Retirement Research at Boston College, 2015

Next Month

Look for our next installment featuring an infographic highlighting the lifetime income factors in this article.


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