Annuities: The solution to baby boom retirement doom?
For millions of baby boomers, retirement time is at the doorstep, or at least coming up the front walk. Surveying the fabulous ’50s, the swinging ’70s, the new age ’90s and since, these boomers now wonder: “Is the best still to come?”
Time will tell. According to 2010 Social Security data, for a boomer couple where both are age 65, at least one spouse can expect to live another 23 years, hitting age 88.1 Continued advances in medical science may stretch those life expectancy numbers farther still, transforming the baby boom into a retirement boom.
That’s great news for a person who plans to enjoy those extended years with family, friends and activities. But as longevity increases, so do living expenses, health care outlays and other income needs during the retirement journey.
That’s where reality intrudes.
The math is indisputable. The longer boomer life spans grow, the larger certain financial needs.
Results from the Employee Benefit Research Institute (EBRI) Retirement Confidence Survey2 capture an array of concerns:
- More than a quarter of all American workers (27%) are not at all confident about having enough money for a comfortable retirement. That is a record high for the 21 years of this survey.
- Less than one-third of workers (28%) feel very confident they will have sufficient money for basic expenses during retirement. Only 12% are very confident they will have enough to pay for medical expenses. Fewer still (9%) are very confident they will have enough for long-term care.
- When asked to gauge their progress in planning and saving for retirement, 70% of workers rate themselves behind schedule, either a little (30%) or a lot (40%).
- The numbers on savings and investments explain the lack of confidence. Some 56% of workers place the total value of their household’s savings and investments (excluding the value of their primary home and any defined benefit plans) at below $25,000.
That’s the state of retirement preparedness for American workers in general. What about baby boomers in particular? As the ones closest to retirement, are their financial houses in better order?
Again, the news is sobering. The EBRI Retirement Readiness Rating annually tracks a database of 24 million 401(k) participants to provide an assessment of national retirement income prospects.3 The ratings define early baby boomers as those born from 1948 to 1954 and late baby boomers as those born from 1955 to 1964.
Findings of the 2010 ratings included:
- Almost half (47.2%) of early baby boomers are projected to be at risk of not having sufficient retirement resources to cover basic retirement needs and uninsured health care costs.
- More than 4 in 10 late baby boomers (43.7%) are likewise projected to be at risk of lacking sufficient retirement resources.
Not surprisingly, the retirement funding challenge is most acute for those nearest retirement. Dividing early boomers into quartiles based on their preretirement income (assuming retirement at age 65 and individual account balances greater than zero), the ratings concluded:
- 61% in the lowest quartile are expected to eventually deplete their financial resources while still alive.
- The same will likely happen for 49% in the second-lowest quartile, 39% in the third quartile and 17% in the highest quartile.
The annuity advantage
So for boomers, what will retirement be — a boom or a bust? The need for a sustainable portfolio of financial resources, one that can supplement a boomer’s other retirement plans, is essential. Aligning spending needs, income flows and wealth preservation in a balance that can last a lifetime makes for some pretty complex retirement math.
Some financial products, such as CDs, preserve principal by guaranteeing interest rates for specified periods of time. Other alternatives, such as mutual funds, pursue long-term growth with no assurance of stability. These options may address potential investment pitfalls, but they also may lack key advantages often available in retirement funding vehicles many consumers may know little about — annuities.
A wide variety of annuities now exist. Different types possess different features and benefits, ones that may show their true value after the market tumult of recent years.
For example, annuities today can offer consumers:
- Guaranteed lifetime income. Creating an income stream that an owner can’t outlive is a key annuity benefit and one very few retirement alternatives offer. This can be done a number of ways depending on the contract. Basically, the insurance company that issues the annuity guarantees to make income payments for as long as the owner — or the owner and spouse — lives, depending on the annuity payout option selected.
- Asset protection for beneficiaries. If the contract is properly structured, death benefit provisions may safeguard assets for the owner’s beneficiaries, avoiding the delay and expense of probate.
- Tax deferral. Because income tax on annuity growth is not due until an annuity withdrawal is taken, assets can compound on a tax-deferred basis. Annuity assets compound faster than currently taxed alternatives growing at the same rate. Assets can earn a return, earnings can earn a return, and money that would have otherwise gone to pay taxes can earn a return.
- Growth potential. Annuities offer all of these benefits with the potential for asset growth through fixed interest rates, variable investment options and increasing payout riders, depending on the type of annuity product selected.
The way boomers plan and save today will have considerable impact on how they will live tomorrow. A financially secure retirement requires realistic planning and action, and the sooner, the better. Annuities offer the wealth-building combination of compound interest growth and tax deferral, which together may mean more secure, spendable income in the long run.
Today’s financial professionals are well positioned to help explore and address the retirement income needs for the baby boomer generation, helping turn the baby boom into a retirement boom.
Mark E. Caner, M.B.A, AEP, ChFC, CLU, CFP, is the president of W&S Financial Group Distributors Inc.,
1. 2010 OASDI Trustees Report, August 9, 2010.
2. 2011 Retirement Confidence Survey, Employee Benefit Research Institute, March 2011.
3. EBRI Retirement Readiness Rating, Employee Benefit Research Institute, July 2010.
A variable annuity is a long-term financial vehicle designed for retirement purposes. An insurance company accepts premiums and provides future income or a lump sum to the contract owner by contractual agreement. Contract limitations, fees and charges include, but are not limited to, mortality and risk expense charges, administrative fees, surrender charges, additional fees for optional benefits and underlying fund expenses. Withdrawals also may be subject to charges and may reduce annuity contract benefits and values. Refer to the product and fund prospectuses for full details.
Payment of benefits under the annuity contract is the obligation of, and is guaranteed by, the insurance company issuing the annuity. Guarantees are based on the claims-paying ability of the insurer. Variable annuities are suitable for long-term investing. Earnings and pre-tax payments are subject to income tax at withdrawal. Withdrawals prior to age 59½ are generally subject to a 10% IRS penalty tax. Investment return and principal value of an investment in a variable annuity will fluctuate, so units, when redeemed, may be worth more or less than their original cost.