The financial crisis challenged investors’ faith in the stock market. Equities’ sharp drop during the crisis, and their up-and-down ride recently, have encouraged investors to be more cautious with their money. Baby boomers especially have re-evaluated their approach.
“Boomers are creating their retirement income strategy and looking for peace of mind,” said Eric Henderson, senior vice president of life insurance and annuities at Nationwide®. “They seek financial security and family well-being above high-risk investment returns.”
Boomers are falling short of retirement goals
Roughly 10,000 baby boomers retire every day, and that pace is likely to continue for about 15 years. Unfortunately, the percentage of baby boomers who feel financially prepared for retirement has dropped since the financial crisis. In 2011 nearly 40 percent of boomers thought that they had enough money to retire comfortably. Today that number has dropped to roughly 25 percent.
Henderson adds that many boomers have to retire earlier than planned as the result of health problems or layoffs. Such forced retirements put additional pressure on a boomer’s finances.
Skittishness about equity markets, coupled with feelings of financial insecurity, indicates many baby boomers are looking for a reliable source of retirement income.
“For baby boomers exploring ways to fund retirement, annuities are the only product that can insure against outliving retirement income,” Henderson said. “Annuities offer a dependable income stream that offers financial advisors a good option to help their clients prepare for retirement income needs.”
Annuities are not all created equal
There are two main types of annuities: those that pay out immediately and those that defer payments to a later date. Both offer the advantage of deferring taxes until the money is paid out, as well as the option to purchase a death benefit that returns a portion of the annuity’s cost to the client’s heirs. The right kind of annuity for a particular client depends on his or her financial situation, needs and goals.
“As clients seek guidance to create a retirement income strategy, advisors can explore a wide variety of annuity product options that can be tailored to meet each client’s unique needs,” Henderson said.
For example, people who are on the cusp of retirement may benefit most from immediate annuities, which enable them to turn their savings into a regular stream of income. A deferred annuity may make more sense for clients who are years from retirement or are primarily concerned about outliving their savings.
Both immediate and deferred annuities can be fixed or variable. With a fixed annuity, payments are set at a pre-determined amount each month. This type of investment would have clear appeal to a conservative investor.
Other clients may want an annuity’s income guarantee, but also the opportunity to improve on it. These clients could consider a variable annuity. Income from variable annuities is tied to the stock market or to a bundle of investments; if the portfolio performs well, the annuity’s payout may exceed the guarantee. An investor also may choose a combination of fixed and variable payments.
“Whether fixed or variable, annuities offer benefits—such as tax deferral, lifetime income and death benefit guarantees—that today’s retirees tell us they are looking for as they create their retirement income strategy,” Henderson said.
Helping you help your clients
Annuities may help you build secure retirement income strategies for your baby boomer clients, while alleviating the anxieties of those with strong memories of the financial crisis and bear market.
Henderson notes that annuities can serve as effective components of a plan that also includes considerations about Social Security, health care and other factors. “Today’s boomers have a variety of needs and challenges, and annuities can help advisors and their clients address them,” he says. “Annuity providers also have tools and resources that can help solve a range of challenges, from maximizing Social Security to factoring a retiree’s unique health care expenses into his or her income strategy—so we can be a real partner for baby boomers and their financial advisors.”