A Social Security cost-of-living adjustment could have a small but positive impact on retirement planning.
By Cyril Tuohy
Retirement investors would have you believe that they crave income, particularly when low interest rates are putting a crimp on their fixed-income investment portfolios, and that they sleep well at night knowing the “guarantees” offered by annuities will pay the bills.
Annuities, proponents maintain, offer a stable income vehicle to supplement their pensions and Social Security — which itself is the largest annuity program in the country.
But if that’s the case, why aren’t annuities selling much faster than they are? And why, according to a recent report in The Wall Street Journal, are disputes involving variable annuities on the rise when they appear to be declining along with other types of investment?
Record sales will tell you that annuities are selling well, according to those who make a living tracking such data.
Fixed annuity sales hit $22.6 billion in the third quarter, up 35.2 percent from the year-ago period, said Beacon Research, with both categories in the fixed annuity family – indexed annuities and income annuities – also setting quarterly records.
On its face, it’s hard to argue with such numbers but, if you think about it, that’s nowhere near the kind of numbers annuities should be racking up, said analyst and consultant Howard Schneider, principal of Practical Perspectives.
The approximately 80 million baby boomers, that huge demographic bubble of Americans born between 1946 and 1964, have been retiring at a rate of about 10,000 a day since 2011, when the oldest boomers turned 65.
With more than 70 percent of advisors saying that they increased the number of retirement income clients they serve in the past 12 months, and with a regulatory push to secure income for current and future retirees, annuity sales should be going through the roof, Schneider said.
Yet in an interview with InsuranceNewsNet, Schneider said that’s not the case. “You’re not seeing the surge associated with new retirees,” he said.
If annuities are not selling anywhere near as fast as they should, where are advisors steering all these retirees? What are they buying to fund retirement income portfolios?
Financial advisors, he said, are turning to actively managed mutual funds, individual securities and Exchange Traded Funds (ETFs), and using these products more broadly than annuities across the client base, Schneider said.
Schneider and Dennis Gallant, president of GDC Research, co-authored “Retirement Income Insights 2014: Using Products and Providers,” a report on retirement income support based on interviews with 600 advisors.
Annuities, which have always been complicated compared to life insurance, are still too complex, the authors note. In several cases, clients have been sold annuities which were later deemed inappropriate and the matters have ended up in court.
Insurance carriers, seeing the huge opportunity in income protection for baby boomers, have tried to make annuities more attractive by adding new features but in many cases have succeeded in further muddying people’s understanding of them.
“A lot of retirement products are complex to understand, many are not transparent and (people) don’t understand what’s going on,” Schneider said. “We hear over and over from advisors who tell us if we can’t understand it, I can’t offer it to my client.”
Advisors don’t necessarily need more retirement income products, but they do need more reasons to use or buy what is already on the market, he said. Advisors aren’t willing to dismiss new solutions, but they need to be shown that what is new is somehow better than what they have now.
Simplicity is the order of the day. Nearly two-thirds of advisors cite simplicity as a major challenge in using new products and solutions for retirement income, Schneider said. That theme of simplicity was reinforced recently by another study published by the Deloitte Center for Financial Services.
The clarion call for simplicity isn’t limited to products and solutions, but to processes and to clients as well, and how they see their future, Schneider said. Fewer than one in five advisors is highly satisfied with retirement available from asset managers and insurance companies.
“Few firms are singled out by advisors as leaders in retirement income delivery,” Gallant said. “This underscores the opportunities and challenges that product providers face in helping advisors serve retirement income clients.”
It helps if clients have realistic expectation of what they can and can’t afford in retirement. A $100,000 retirement account isn’t going to fund a 30-year retirement lifestyle in Myrtle Beach, S.C. The sooner a client comes to terms with this, the more value an advisor provides, Schneider said.
Cyril Tuohy is a writer based in Pennsylvania. He has covered the financial services industry for more than 15 years. Cyril may be reached at firstname.lastname@example.org.
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