Indexed Annuities for Younger Savers
According to recent surveys, millennials and Gen X investors have indicated that they would be interested in purchasing indexed annuities.Historically, advisors have mostly pitched annuity products to clients who are nearing retirement age.In the wake of the market downturns in 2008 and 2009, however, younger clients have begun expressing interest in annuities as a way to protect against the types of significant losses experienced by equity-market investors during the Great Recession.
We asked two professors and authors of Tax Facts with opposing political viewpoints to share their opinions about whether financial advisors should encourage younger individuals to purchase indexed annuities.
Below is a summary of the debate that ensued between the two professors.
Byrnes: Indexed annuity purchases are valuable to taxpayers during all phases of life.The fact is, many younger workers who experienced the 2008 "Great Recession" are deeply concerned about losing large portions of their savings in any future market downturn.Lifetime income solutions like indexed annuities can provide the protection these younger individuals are seeking—and can offer upside potential with greater protection of the underlying principal investment while the investor is still accumulating retirement assets.
Bloink: Yes, products that provide for guaranteed lifetime income are extremely valuable and always have their place in a retirement income planning discussion.We have to remember that on the flip side, annuities are also incredibly complicated products.For many younger workers, the fees and expenses associated with maintaining an annuity product can dig into their savings in ways they might not anticipate.When we're comparing investment strategies for younger individuals, annuities are simply not always the best option.
Byrnes: Annuities have evolved significantly in recent years.Annuity options are now extensive, giving purchasers options for buying annuities with shorter surrender periods to avoid concerns about being "locked in" to annuity products that no longer serve their needs. Many indexed annuities now offer surrender periods of only three to five years to allow greater flexibility and allow these younger investors to respond to market changes.
Bloink: We also have to remember that the locked-in problem can be very real. When we're talking about younger individuals whose circumstances are likely to change substantially over time, locking into an annuity product may not always be the best idea.Yes, annuities today offer extensive options—and those options come at a price.
Byrnes: The bottom line is that taking steps to ensure lifetime income is always something that we should be encouraging--regardless of the individual's age.More and more, investors are taking a vested interested in securing their retirement income at younger ages. This is always a positive—especially when we consider how vulnerable today's traditional Social Security system has become.
Bloink: Market conditions will always change over time--as will interest rates.Locking into a product at a younger age creates the risk that these young investors can lose out on market upturns out of fear created by market downturns.For the conservative investor who is approaching retirement, locking in makes sense.These older investors simply don't have the time to wait for a market rebound, especially once they've reached the decumulation phase of retirement. In the end, it's critical that younger investors who are interested in indexed annuity products understand all of the facts—and advisors must remember that it's up to them to ensure the client understands both the pros and the cons before buying any financial product.