The year 2014 closes with a return to a discussion of whether younger adults, in their early-50s and or late-40s, are candidates for annuity ownership. Only this time, the focus turns to even younger adults — people in their 20s and 30s. Might individual annuities be an option for them?
The industry group-think says that workers in this demographic just won’t want to, or be able to, pay into an annuity for many years to come. For good reason: The younger adults have school loans to repay, families to form, cars and houses to buy, college education accounts to arrange for the kids, and, yes, technology to acquire. Besides, if they stash their cash in an annuity, they would face penalties if they needed to withdraw some or all of those funds before age 59.5; and if they buy annuities with certain bells and whistles, the costs for those features could detract from account growth at a time in life when maximum tax-deferred buildup is the primary goal.
Some annuity veterans wonder if younger adults could even understand an annuity when they are still wet behind the financial ears, so to speak.
But now comes news from Gallup that might prompt a re-think of the group-think.
Saving for retirement before age 25
In a November survey, Gallup found that 26 percent of more than 1,000 U.S. investors reported having started saving for retirement before they turned age 25. That includes 7 percent who started before age 20.
In addition, 23 percent more began saving for retirement between ages 25 and 29, so nearly half of the entire survey group started before age 30.
None of this says anything about savings in annuities. Just savings for retirement. We’ll come back to this momentarily.
To be included in the survey, the adults needed to have at least $10,000 invested in stocks, bonds or mutual funds. Only 20 percent of adult Americans fit that category, said the researchers, which conducted the poll on behalf of the Wells Fargo/Gallup Investor and Retirement Optimism Index, a joint project of Wells and Gallup.
Presumably, these individuals did not have $10,000+ in investments when they started saving for retirement. Most likely, many had less, perhaps much less.
The key point is that these adults, both retired and nonretired, started saving for retirement when they were younger. For instance, 91 percent of nonretired investors reported saving, with the average starting age being 29. Among the retired, the average starting age was slightly higher but not by much — age 35.
The researchers did not report on which products these savers started out with, but a good guess is that it probably wasn’t annuities, for the reasons cited above.
More than likely, they started out with a retirement plan at work and/or a savings account at the local bank. For some, it might have been an individual retirement account (the 40th birthday of which is tomorrow, incidentally) or maybe an auto-investing plan with a mutual fund (perhaps guided by a parent or other trusted elder).
But what about today? Could it be that savings-minded younger adults might be interested in adding annuities to their “retirement savings portfolio”?
By the way, today’s younger adults definitely have savings on the mind. For instance, a Financial Fitness survey in 2013 found that millennials ranked investing as their third highest financial priority, behind managing cash flow and getting out of debt. A Prudential study in 2012 found that 63 percent of millennials, then aged 21-29, were participating in their retirement plan at work and that “saving for retirement ranks highly in this generations list of financial priorities.” A 2012 survey by the American Institute of Certified Public Accountants and the Ad Council found that fully 94 percent of 25- to 34-year-olds were at least somewhat likely to make saving a priority.
What could possibly interest these younger savers in an individual annuity? The tax deferral, guarantees, flex-pay structure, ability to 1035 exchange policies, withdrawal privileges in the later years, and the retirement income stream “for the day when.” Even the fact the fact that the customer can buy an annuity independent of an employer could hold interest for those who anticipate frequent job changes.
A word about flex-pay policies
In the past two or three years, much of the annuity industry’s focus has been on income annuity products and riders. That’s been a long time coming and it’s a positive development, given the waves of baby boomers now reaching the shores of retirement.
But income annuities are not likely to appeal to most (or any) younger savers. The young tend to want, and appreciate, flex-pay, auto-pay or frequent-pay by whatever name.
To interest younger adult customers — who are moving into the middle-market that many carriers say they want to reach -- maybe the annuity industry should start reminding everyone that flex-pay deferred annuities exist too. True enough, interest rates are still quite low, so the come-hither in the promotions will likely not be the rate. But then, interest rates are low everywhere, so rate-based promotions will probably not be the main attraction anywhere.
The main attraction just might be exactly what the deferred annuity was designed to do — provide long-term, tax-deferred retirement savings, with steady build up over time, on a guaranteed basis in a fixed annuity or on a market-based gain basis in a variable annuity, with the ability to generate an income stream later on, in retirement.
The fact that the owner can feed the annuity on a flex-pay will be a definite plus in this market.
The image of annuity
Annuity professionals never fail to mention that younger adults almost always turn up their noses on annuities. Sometimes this is due to lack of awareness, they allow. But other times, it comes from a stereotype that “annuities are for old people” or from having seen headlines that bash annuities.
But today’s younger adults may be taking a different financial path than previous younger adults. Many are aware that cutbacks in Social Security benefits may occur one day, and that this will affect their finances. The Gallup survey indicates people are already thinking about how they would manage that.
For instance, the researchers asked the following hypothetical question to nonretired investors in the poll group: How might knowing that they would not receive any money from Social Security in retirement influence their savings behavior?
Thirty percent said this development would motivate them to save a lot more money for their retirement, Gallup reported. Another 24 percent said it would motivate them to save a little more. So over half are already thinking about what to do.
Maybe, just maybe, an annuity could help them accomplish this goal, even starting right now.
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