2021 Will Give RILAs Their Moment In The Sun

2020 was an incredibly challenging year to say the very least, and nearly everyone has been affected by the COVID-19 pandemic. Not only has the pandemic been incredibly lethal, but also it has exacted a devastating toll on our economy unlike any we have observed since World War II. 

We continue to focus from a medical standpoint on protecting the most vulnerable Americans — many of whom are of retirement age and thus not dramatically affected by the prospect of job loss. But from a financial security perspective, the conundrum faced by those still working but approaching retirement calls for greater discussion.

Millions of jobs have been lost and countless businesses have failed due to the public health measures enacted to slow the spread of the pandemic. Many of these losses have fallen on low-wage workers who were already the most financially vulnerable, but when pre-retirees lose their jobs, their chances of regaining employment are much lower, and the financial and emotional effects of these job losses can be irreversible throughout their retirement.  

Now it is important to note that all this upheaval in the labor market and wider economy is taking place as the stock market continues to hit new highs. It is truly “A Tale Of Two Cities” as near-zero interest rates designed to incentivize buying and borrowing to stimulate the economy today lead many to flock to the stock market in search of yield instead of putting money into protected savings.

So how can pre-retirees get in on the action of upward market trends as a means of bolstering their chances of retiring safely, without opening themselves up to risk by getting too wrapped up in irrational exuberance? 

A great way to balance priorities for this segment of the population is through the use of registered index-linked annuities, which are particularly well placed for this unsteady economic environment. These products allow for increased savings growth with better, customized risk control and access to future guaranteed income — all key components to planning for and achieving a comfortable retirement.

Annuities in general give savers the ability to stay invested (i.e., putting their money to work) and reduce the risk of potential losses, which make them a compelling alternative to other hallmark safe-haven products, such as certificates of deposit or bonds. While many fixed annuity products tend to see lower sales during periods of low interest rates — warranted or not — variable annuities aren’t tethered to interest rates and can offer unique benefits to savers. 

RILAs are structured differently in that they are tied to the market rather than a fixed rate, generally resulting in greater upside potential. For the past century, the average stock market return has been around 10% per year. This higher rate of return, especially at the current moment in time, is more lucrative than are fixed products, allowing customers to use RILAs to push the limits of a low-rate environment.

What also makes RILAs so versatile is the level of flexibility they provide through their customizable risk exposure. Savers are able to identify a comfort zone based on how much they’re willing to lose and what their income accumulation goals are. This customized approach gives people the freedom from trying to “time” investment strategies and offers them the option to seek more stable long-term returns. 

The adjustable comfort zones for RILAs can be structured in two different ways, buffer style or floor style, each of which uniquely provides upside potential with protection against downside risk. For floor-style RILAs, customers are able to set the maximum percentage of loss they are willing to take on as the “floor.” If the determined floor is set at -10%, the customer will not lose anything beyond that percentage linked to the market. At the same time, the owner can earn only up to a “cap” on market gains, which is set to provide a notably higher amount of upside potential than most fixed products offer. 

On the other hand, buffer-style RILAs give savers a buffer against loss rather than a floor. This means they are protected against a certain percentage “buffer” of loss by the issuer, while the remaining percentage loss is incurred by the customer. This type of RILA works best with a saver who is willing to accept a little more risk in search of further gains. With a 10% buffer, a portfolio that declines 45% would result in an experienced loss of 35%. Like the floor style, the owner can earn only up to a cap on market gains.  

In both cases, cap levels are unique to the RILA, are guaranteed for some period of time (e.g., one year, three years) and vary based on market conditions.

Both the floor and buffer model for mitigating risk with RILAs are particularly beneficial right now as hedges against market volatility exemplified by extreme highs and lows. While it is clear that missing out on the worst days in the market raises portfolio value over time, evidence also shows that the benefits of remaining part of the best days still don’t outweigh the benefit of being on the sidelines for the worst days.

A controlled study done on a portfolio of $100,000 invested from 1994 to 2014 that missed out on 40 of both the best and worst days in the market resulted in a 23.4% increase in comparison with the same portfolio with those days included. Having both the upside and downside potential from investing in the market is important, but with the bumpers built into RILAs, a nest egg has the potential to grow in a more stable fashion than it would in other investment vehicles.

Beyond the opportunity for regulated growth, an emerging benefit being offered with some RILAs lies in providing access to a flexible source of guaranteed income in retirement. Gone are the days of the security of reliable, regularly scheduled pension plan checks provided to most employees. With increasing lifespans and rising health care costs, the uncertainty of having a large enough nest egg for retirement is greater than ever. In order to guarantee savers do not outlive their savings, some RILAs have begun offering a guaranteed lifetime withdrawal benefit. 

GLWBs guarantee income for life while also providing upside potential and liquidity through access to remaining account balances. A RILA paired with a GLWB provides a powerful vehicle for accumulating savings in a protected manner that allows for real upside opportunity, limited downside risk and the safety of income for life. This tool can help mitigate uncertainty caused by the pandemic and recession, which have wreaked havoc on the lives of many pre-retirees. Financial security feels less certain now, particularly for the segment of the population approaching retirement. 

RILAs should get a closer look as they are uniquely positioned to help during times like these. Given that we’re still some time away from normalcy, those approaching retirement have the perfect opportunity to think about the best ways to stay secure now while trying to gain some upside to enjoy retirement with.

David Hanzlik is vice president of annuity and retirement solutions, CUNA Mutual Group. David may be contacted at [email protected].