Just like Sebastian Junger’s excellent book, “The Perfect Storm,” the annuity industry has a major hurricane coming, blowing from its back.
The storm was devastating for the crew of the Andrea Gail, but good for the success of Junger’s book.
The COVID-19 pandemic is tragic for the people who get the virus, and for the businesses and workers struggling with shutdowns. But it will be good for demand for products that provide certainty.
At no time in recent history has a storm of this epic proportion happened in the annuity industry. The aversion to any risk, the massive baby boomer population, and the absolute need for guaranteed income has shoved annuities to the forefront of the financial world.
As the financial world deals with the coming substantial bank losses from borrowers, mortgage companies are fearing a large transfer of real estate obligations to them. Banks are unable to offer anything reasonable in interest rates; the annuity category stands as the obvious choice for those who fear to confront risk.
(Related: All Is Not Quiet on the Annuity Front)
Guaranteed interest rates, guaranteed lifetime income, removal of risk, and the lowering of personal stress are immediate benefits and a pure target for millions of people. Adding to the stress and anxiety caused by the current worldwide pandemic, the worry and concern over the future financial catastrophe can be too much for many. Adding to the pressure of an unknown future is that many baby boomers are still working and need to accumulate enough funds for retirement still. Many (20%) in this group have less than $5,000 in personal savings, according to the Northwestern Mutual Planning and Progress Study.
When making later in life decisions regarding retirement choices, the safety and security of retiree’s funds become essential. If a wrong choice is made, most baby boomers would not have enough time to weather the loss and even regain their starting point.
Common sense would tell most people considering retirement that a foundation of “no risk” retirement funds becomes more than essential; they become vital. Where else in the financial world can you earn a reasonable rate of return, have an income guaranteed for a lifetime, and include the benefit to cover a spouse? Nowhere.
Bonds: with the current low-interest-rate environment, any desire for a higher than normal interest rate would come with credit risk and a low rating. Plus, if interest rates increase, the value of the bond in the secondary market would be reduced.
Bank products: current interest rates are extremely low. It doesn’t look like the Federal Reserve is going to increase rates during our recession, plus using bank products for long term retirement means when the money is gone, so is the retirement check. Bank products are also fully taxable on any interest received, whether it is used or accumulated.
U.S. Treasuries: Totally risk-free but interest rates, access to the funds and an adverse tax obligation can make these not acceptable for retirement planning
Market-based assets: When you want the possibility of a larger gain, you accept the risk. The days of the baby boomer buying risk products is minimal.
Real estate products: Access to dividends in a down market can be troublesome, asset devaluation because of vacancy issues is a negative, liquidity, and a sustainable valuation is difficult.
Dividends: Dividends are not guaranteed and subject to change based on the company’s performance and the category of the industry; as an example, an oil producer may have difficulty maintaining their annual dividend because of outside forces lowering the price of oil. Debt refinancing and liquidity needs can also disrupt the amount of the dividend paid.
If you consider the question of how can an annuity company provide these benefits and stay in business when virtually no other industry can? How do they do it? The answer is simple; insurance companies look long term, very long term. A general portfolio of an annuity company’s investments is mostly in bonds. Not a bond portfolio like a mutual fund may offer, but a unique approach to bond ownership, a 40-year long window of bond ownership.
Consider a portfolio containing bonds bought 20 years ago, and bonds bought now and held for 20 years, that is 20 years in arrears and 20 years in the future, stability. Investing can be much like an ocean wave; it comes crashing in; it has enormous ups and downs. But an insurance company portfolio is more like the ocean tides, slowly rising, slowly lowering.
Stability, guarantees, and commitment to the long term that is the advantage an annuity provides.
Finally, there is the gorilla in the room — health care — and, eventually, long-term care in a safe and secure care facility. Currently, those on social security spend 41% of their income on health care expenses and that which expected to increase. Exposure to risk and loss not only hurts retirement options but places the retiree in a different degree of danger, not enough money for health care needs.
The stress created from concern and worry from having enough funds for retirement and choices for how retirement will be received now include concern over health care protection. Some annuity products have riders that can help with medical expenses and provide the needed funds for the end of life.
Everyone runs to safety sooner or later, and it is now the baby boomer’s time to do just that, use an annuity product for their myriad of guarantees, and for lowering of stress.
Bill Broich is the co-owner of Annuity.com, a website that connects consumers with financial professionals.