Guarantees Are In; Speculation Is Out
The new direction of income planning
There’s no mistaking the sobering change that has swept through the retirement savings marketplace since 2008. A bull-market fixation for investment growth is gone. A focus on accumulation of assets has changed, stressing continuity and dependability. Blame it on the aging of America or call it collective pragmatism, the fact is the industry’s new focal point is distribution, namely, how we can ensure clients receive steady income over the course of their retirements. Guarantees are in, speculation is out. Today, retirees want income protection, not rates of return.
For evidence of American‘s new take on retirement savings, look no further than annuity sales in 2010. Immediate annuity sales reached $7.6 billion last year according to the insurance industry association LIMRA, a mere 4% off record highs in 2008. The reasons for the shift are very logical. The average life expectancy in the U.S. is 76 years for men, 80 for women, so it’s not farfetched to think your clients might live 25 or more years in retirement which only increases the possibility of them outliving the money they’ve saved. Meanwhile, it’s impossible to ignore the volatility that’s gripped global financial markets in recent years. Your clients are likely riveted to today’s perfect storm of CNBC headlines about Southern European debt woes, partisan U.S. fiscal budget squabbles, Standard & Poor’s downgrade of Treasury bonds and talk of a double-dip recession. A generation of pre- and post-retirement clientele is on edge, and rightfully so. They believe that each sharp swing of the market will hit directly in their pocketbook or wallet.
For advisors, the change in attitude translates into a formidable opportunity because there’s a growing demand for products that safeguard assets and deliver sure, predictable results. Chief among them: the single premium immediate annuity (or SPIA), an instrument that’s designed to function as a simple way to produce retirement income. SPIAs establish an easy way to provide steady streams of income over the 10-, 20- or 30-year course of retirement (which could be a lifetime) without the worry of it being affected by the fluctuations in the financial markets.
New Ways of Thinking The first step on the road to distribution-centered thinking is a reexamination of long-term retirement needs from a new perspective. In the past, it mattered how a client accumulated retirement savings. Now, it matters how a client can produce income from those retirement savings and how long they can make it last. Let’s face facts. The U.S. government’s Center for Medicare and Medicaid Services estimated that 9 million men and women over the age of 65 will need long-term care this year, a number that is expected to jump 33% to 12 million in 2020. According to calculations released by the Employee Benefit Research Institute, a 65-year couple in 2009 needed $210,000 to have a 50% chance of meeting their health expenses. The same study put a $338,000 price tag on a 90% chance of paying the medical bills. Numbers compiled by the U.S. Department of Health and Human Services estimate that Americans who reach 65 have a 40% chance of entering a nursing home at some time and that 10% of those who do will end up staying five years or more.
Don’t forget the growing number of sandwich generation members, he legion of baby boomers that are now stretched emotionally and financially to help both their parents and offspring. There is increasing likelihood that your clients who belong to this demographic group will have to shoulder financial responsibility for their elderly mothers and fathers. The Center reports that most elderly in need of care, 70 percent, are helped out by family and friends. And in tough economic times, retirees may have to come to the aid of grown children who may need a lifeline even after graduating from college. Boomeranging sons and daughters only add to the burdens draining your clients’ retirement funds. Longevity, and the many personal and familial bills that come with it, makes it ever more imperative to create sound income distribution strategies that can usher clients through their retirement in comfort and confidence. The foundation must be strong, sturdy and dependable. It begins with a source of income that your clients cannot outlive, anchored in products that clients can only purchase through you, their advisor.
Embracing Change Don’t think of SPIAs as an end or a slowing of your advisory relationship with clients. SPIAs are only for a portion of your clients’ assets, not all of them. In fact, SPIAs not only have the potential to preserve your role as an investment advisor, they can open you up for additional opportunities with your high net worth clients. Thatâ€™s because SPIAs enable your clients to be assured during times when uncertainty has pervaded financial markets the world over. SPIAs work as a stabilizing position in your clients’ retirement portfolios. They provide peace of mind and the comfort in knowing that a chunk of income, to cover living expenses and fund the lifestyle they envision, is guaranteed and independent of market returns. Once clients feel confident that a foundation is in place, it becomes much easier for you to open the conversation about investing the remainder of their assets. And of course, your job going forward will be to advise them on ways to best manage those assets.
Designer Income It’s time to change our perception of immediate annuities to fit the times and our clients’ needs. That’s because they effectively function as ‘designer income,’ a product your client can set to generate regular income checks for a specific period of time or for their lifetime. Some SPIAs may even give your clients an option to increase their payments year over year to help combat inflation. It’s a good idea for advisors to begin exploring SPIAs as guaranteed income annuities from day one when you sit down with clients who are nearing or at retirement. LIMRA studies show that the average age of immediate annuity buyers is 73, with an average premium of just over $107,000. Interestingly, the same reports show that a third of buyers are clustered around the ages of 62, 65 through 67 and finally 70 to 71. The message is this: There’s plenty of room to expand the market. Don’t forget high net worth clientele. The truth is that by securing a portion of your high-net worth client’s assets for retirement, you can cover their basic needs or lifestyle needs. The remainder of your time can be spent setting up strategies to manage their other discretionary assets.
Diversifying In closing, I’ll draw on an analogy I often use to explain how your clients are likely to view SPIAs in times like these. Consider this: Homeowners may pay for fire insurance and, hopefully, will never have to tap into the policy’s benefits. Why wouldn’t you want them to consider a way to protect their retirement income, but be able to tap its benefits immediately and for the rest of their lives? SPIAs can be thought of this way, and you’ll see that SPIAs are coverage to assuring retirement income, guaranteeing that your clients never outlive their money
by Douglas Dubitsky Mr. Dubitsky is Vice President, Retirement Solutions for The Guardian Life Insurance Company of America