Annuities can be a difficult product for some financial advisors to talk about. Some financial pundits have criticized annuities due to perceived disadvantages, and some clients have a preconceived bias against them. Nevertheless, NOW is the perfect time to be talking to your clients and prospects about the value of indexed annuities for retirement income.
Why? Interest in annuities has risen steadily in recent years as concerns about inflation, market volatility, tariffs and potential cuts to Social Security benefits grow. Online searches for the keywords “annuities” and “pensions” have increased by 160% while searches for the phrase “are annuities good or bad?” are up by 200% and searches for the phrase “compare annuities” are up 300%.
In this environment of uncertainty, many clients are seeking a financial solution that will provide them with a guaranteed source of income in retirement that is shielded from the ups and downs of the stock and bond markets. Studies have shown that one of people’s greatest fears is running out of money before they die. In fact, one study conducted by Allianz Life found that two-thirds of people worry more about running out of money than they worry about dying.
A Retirement Income Seatbelt
All of this makes now a good time to talk to clients about the role that annuities might play in their overall financial plan. However, some advisors struggle to explain annuities in a way that doesn’t sound too salesy.
One way to solve this problem is to position annuities as a retirement income “seatbelt.” For example, explain to clients that they don’t wear a seatbelt because they plan to crash their car. Instead, they wear one in case they get in an accident.
In the same way, fixed indexed annuities offer retirement income protection from market volatility, inflation and potential reductions in Social Security benefits while still allowing for potential growth. By explaining annuities this way, you are shifting the conversation away from selling an investment alternative to one that discusses providing a safety mechanism for the client’s income strategy.
According to a study conducted by David Blanchett and Michael Finke, many retirees prefer the security of guaranteed lifetime income over tapping into their retirement savings, even if they can afford to. Another study conducted by Ibbotson, Shiller and Pfau determined that fixed indexed annuities improve retirement outcomes when used correctly by addressing longevity and market risk.
Creating a Lifetime Income Stream
When discussing annuities with clients, explain how they fit into their overall financial retirement plan. Some clients think that if they have a 401(k), IRA or other retirement savings account, they have a comprehensive retirement plan. But this is only half of the equation — the other half is how they will create an income stream once they leave the asset accumulation phase of their life and enter the asset distribution phase.
As clients get closer to retirement, they need to reconsider how much of their savings is exposed to stock market volatility. In particular, these clients may face what’s referred to as sequence of returns risk. In other words, if they start withdrawing money from their retirement account during a market downturn, they could deplete their nest egg much faster than if they started withdrawing money during a market upswing. The problem ever retiree faces, of course, is there is no crystal ball to tell them whether they may be retiring into a positive or negative market as they begin to take income from their nest egg.
Using fixed indexed annuities for retirement income can help protect against this risk by putting a portion (not all) of the client’s retirement savings into a vehicle that provides them with guaranteed income for the rest of their lives, regardless of how the markets perform. The advisor can then invest the rest of the client’s assets in the markets to generate additional return, depending on the client’s age and level of risk tolerance.
Making the ROI Pivot
Another powerful idea is to explain to clients how their perspective on “ROI” should shift as they enter retirement. When clients are younger and in the asset accumulation stage, ROI stands for return on investment. But as they approach and enter retirement, the definition of ROI changes to reliability of income because this is more important than generating a high return.
In other words, clients entering retirement have more to lose from a bear market than to gain from a bull market. A fixed indexed annuity provides a steady stream of reliable income while shielding assets from market volatility.
Customize Annuities for Your Clients
A wide range of annuities are available to help clients meet their financial goals. For example, some annuities have contract provisions that can offer inflation protection while others offer premium bonuses that boost the annuity contract’s value upfront. Annuities may also offer terminal illness, long-term care, or other riders so you can customize an annuity based on your client’s specific needs. All fixed and fixed index annuities guarantee the client’s principal (and credited interest) against market losses. Because annuities are insurance contracts, clients are not investing directly in the market, but rather the annuity tracks an external market index. It’s also important to work with highly-rated insurance companies because the financial strength of the issuing insurer backs the guarantees in the annuity contract.
Want to see how fixed indexed annuities for retirement income can be a benefit to your clients’ retirement plans? Click here to request a call from our annuity marketing team! We’ll share how we can help you grow your practice and transform your clients’ retirement plans with the benefits of indexed annuities!