A new opportunity for advisors: Younger indexed annuity buyers

Millennials and Gen X investors are no longer shying away from annuities.

In fact, Nationwide's latest Advisor Authority study found that 63% of millennials and 54% of Gen Xers are more likely to put part of their portfolio in an annuity or other guaranteed income solution.

This pivot opens the door for advisors who have historically only used annuities as near-retirement products. They can now focus on positioning them as early-stage planning tools.

“The appeal of fixed indexed annuities can be ageless. What appeals to older buyers may also appeal to younger ones, especially in today’s day and age,” said Paul Garofoli, regional vice president of individual annuity sales at The Standard.

The shift from income to accumulation

For those approaching retirement, the appeal of annuities centers on their ability to provide a steady income for life.

Younger investors, however, are drawn to their potential for accumulation.

“Today’s fixed indexed annuities are being positioned as alternatives to traditional fixed income products, specifically as a bond alternative,” said Brian Kunkel, senior vice president of marketing strategy and field services at AmeriLife.

For younger investors, an indexed annuity’s ability to offer market-linked upside with principal protection is particularly attractive. It can be a smart alternative to other products that are exposed to interest rate risk or market volatility.

“Fixed indexed annuities are now an asset class that can be easily incorporated into a diversified portfolio strategy,” Kunkel explained.

Why younger investors are seeking alternative investments

The Great Recession and its aftermath left a lasting impact on many younger individuals. As a result, they may be suspicious of traditional financial markets.

“You can look at the rise of cryptocurrency as an example of how that suspicion is driving behavior," Kunkel noted. "As younger investors consider alternatives to traditional financial products, fixed indexed annuities can offer market-linked upside with principal protection, providing an alternative to equities or bonds."

Additionally, uncertainty around the future of Social Security and reduced access to traditional pensions have pushed younger individuals to take greater ownership of their retirement income. Fortunately, annuities are uniquely positioned to help them generate retirement income that cannot be outlived.

“The constant message that Social Security is underfunded and won’t be there for the next generation certainly can drive interest in alternative solutions for retirement,” said Garofoli.

The liquidity myth around indexed annuities

Fixed indexed annuities are designed as long-term retirement products, and as a result, many younger investors assume their money will be locked up and inaccessible.

The good news is that there are several new products with shorter surrender charges and additional liquidity options.

“We are in a period of rapid and positive innovation," Kunkel said. "As a result, surrender charge schedules of three, five or seven years or less are common. Shorter surrender charge schedules give younger investors flexibility to reposition annuity assets should the market or interest rate environment change."

How to integrate annuities within a broader financial plan

Most diversified portfolios generally include a stock and bond mix adjusted to the client’s risk profile. Therefore, that’s an easy place to start.

“You may mix in annuities— including fixed indexed annuities—as a noncorrelated asset to complement other investments,” Garofoli said.

At the end of the day, the goal is to position annuities as part of a client’s balanced portfolio, as these products offer features that can provide downside protection, acting as a volatility buffer.

It’s also important to discuss the value of money using income riders, which can help sustain income during retirement.

“Additionally, consider a laddered annuity strategy where multiple annuities with different terms or timing support various stages of a client’s retirement plan,” Garofoli added.

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Anna Baluch is a finance reporter and writer with more than a decade of experience. Contact her at [email protected]