With the Obama administration’s recent push for fixed annuities, laypeople are increasingly becoming aware of these misunderstood retirement savings vehicles. And it’s our job as producers to arm them with all the accurate information we can possibly offer.
Fixed annuities are designed to provide an income for retirement that can’t be outlived. Although they are not the end-all, be-all, they can offer clients one way to help meet their retirement goals. It is debatable how much of a client’s assets should go into a fixed annuity, but most providers recommend that enough is deposited to cover basic living expenses.
Why fixed annuities are on everyone’s minds
A year ago, President Barack Obama appointed the Task Force on the Middle Class. The move was in response to the findings that about half of the nation’s workforce — 78 million — lacked employer-based retirement plans. Also, fewer than 60% of working heads of families were eligible to participate in any type of job-related pension or retirement plan in 2007.¹
The U.S. government has since worked hard to promote fixed annuities as a way to help ensure that our ever-aging retirees won’t outlive their savings, with Treasury advisors highlighting their retirement income benefits in recent articles in the likes of The New York Times and The Fiscal Times.
Why fixed annuities?
With the recent press, fixed annuities are now in the forefront of investors’ and producers’ minds more than ever. And there other reasons why now is a good time to educate your clients.
The issue of life expectancy is a very real concern: The National Center for Health Statistics reports that an American’s life expectancy is 77.8 years, an increase from 69.7 years in 1960. Those who live until age 65 will on average live until age 83.7, compared to 79.3 in 1960. So, fear of death-after-retirement-spent is a valid concern. Fixed annuities offer a lifetime lifeline.
Another concern: A roller coaster of a stock market has made the layperson wary. Fixed annuities help provide security. While fixed annuities do not have the volatility of an investment, the guaranteed death benefit and payment of lifetime income are contingent upon the claims-paying ability of the issuing company or companies.
Also, retirement plans are increasingly complex, while fixed annuities, once in place, free the client from worrying about those complexities.
Finally, fewer companies offer pensions. Annuities can provide a similar function as fixed benefit pension that our parents took for granted by providing a guaranteed income you can’t outlive.
The producer’s prejudices
The first roadblock to successful sales of fixed annuities is your own perception.
Many advisors believe these annuities are only appropriate for conservative investors, particularly the retiree. However, a well-thought-out purchase of a fixed annuity can offer the conservative balance to a well-rounded portfolio.
The use of a fixed annuity as a single source of retirement income is likely not a wise choice. They are not designed to generate rapid growth or to provide funds for emergencies or luxuries. Instead, they are intended to protect the insured from market fluctuations and to provide an income for basic living expenses that can’t be outlived.
Other producers shy away from fixed annuities because they don’t have the confidence to educate. It’s time you educated yourself.
Yes, annuities have a complicated array of options. But understanding the product can bring the client better value. Spend 30 minutes a day reading up on annuities. Insurance companies have material galore on their products, and there are many helpful books and online articles available.
Clients’ concerns
Another roadblock to potentially better-living-through-fixed annuities can be the client’s prejudices. Maybe he or she doesn’t understand how they work. Maybe the client has not thought outside the box — fixed annuities as one component to a diversified retirement plan.
Whatever the reason, it’s clear that consumers have concerns: A Hewitt Associates study in 2007 found that when offered a fixed annuity option with their 401(k), participants very rarely used the option.²
But before you propose a fixed annuity, you’ll want to feel the client out. Does he or she have questions? How much does he or she know? Has the client ever considered them?
To help you in your mission of education, have clear, concise literature ready that will guide you and the client through the products. Current statistics are helpful. Break down for the client his or her generation’s life expectancy. Arm yourself with the product’s expected returns.
Here are some very real reservations you can expect when the subject is broached:
Once I die, the money is gone. My heirs get nothing. Today, this only applies when the client chooses “life income only” option. The most common annuitization is that of the “joint and survivor,” in which income will go to the spouse in the event of the insured’s death.
Annuitized income is taxed as ordinary income, while investments are taxed at the capital gains rate. This is true; you need to educate the client.
Putting money in an annuity ties up liquid cash and is subject to tax penalty if I withdraw before age 59½. This is true. Clients should always have liquid funds available. However, there is a client group that can particularly benefit from annuities — clients who’ve shown a history of overspending, or who find difficulty budgeting or saving.
Fixed annuities see lower growth than other investment options. That can be true. But a healthy portfolio should have a conservative component, and fixed annuities can be a good choice.
I’m concerned about losing control of my large sum of money in exchange for a smaller monthly check. Actually, the recent market tumbles are on fixed annuities side, in this case, because investors’ emotions are still raw on this issue. Fixed annuities can offer safety and security. These annuities are a great way for the investor to sit back and relax — no more worries about the S&P 500. But for some, loss of control is too great a fear, and it’s your job as advisor to respect that.
My income will buy less over time as a result of inflation. Actually, most annuities have inflation riders (available at an additional cost). However, the cost is seen in a lower monthly income.
If the insurance company goes under, I will lose everything. This is true. As financial services professional, you are responsible for proposing products with the highest financial ratings from companies with longevity, including times of recession. Provide clients with clear data which demonstrates the financial strength of the companies you propose.
Final thoughts
In addition to a steady income for the rest of the client’s years, there are other attractions for the wise investor.
Once the fixed annuity is chosen, the investor can sit back and relax. Market fluctuations are not as big of a concern, and there is steady income for food, clothing, housing and medical needs. And, the youthful investor will see tax-deferred growth, and part of his or her principal protected. Also, probate is avoided for that part of the nest egg.
Your ultimate goal is that of educating and making sure a fixed annuity is a good option for your client. If you are armed with accurate information and the best interests of the client, it’s a job well done.
Sales points
Fixed annuities are easier to sell now more than ever, because:
- A volatile stock market makes investors more amenable to new options.
- Workers are living longer and retiring earlier. Will their money run out?
- Fewer companies offer pensions.
- Once in place, fixed annuities offer freedom from this day of increasingly complex retirement plans.
- Mainstream media are covering annuities, bringing the option to the forefront of laypeople’s minds.
Clients who can benefit from fixed annuities
A client in one of the following situations might be a good choice for an annuity:
- Looking for guaranteed income at retirement
- Has a lump sum to invest
- Surrendering a life insurance policy
- Changing jobs — 401(k) pension rollover
- Has money invested in certificates of deposits that are not earmarked
- A client who has a poor history as a money manager
- A risk-adverse client
Clients who should avoid fixed annuities
There are some who should stay away from annuities:
- A client with insufficient liquid assets
- A client who will need retirement income before turning 59.5 years of age
Pamela Green CLU, ChFC, FLMI, is the annuity specialist at Sapient Financial Group, a general agency of Massachusetts Mutual Life Insurance Company (MassMutual). She can be reached at pgreen@finsvcs.com.
Pamela Green is a registered representative of and offers securities and investment advisory services through MML Investors Services, Inc., Member SIPC. One Union Square, Suite 300, 10101 Reunion Place, San Antonio, TX 78216. 210.342.4141.
Footnotes:
1. FACT SHEET: SUPPORTING MIDDLE CLASS FAMILIES, The Office of the Press Secretary, the White House, Jan 25, 2010.
2. Hewitt Associates Trends and Experiences in 401(k) Plans 2007 Survey.