How Today’s Annuities Serve The Needs Of Tomorrow’s Retirees

By Brendan Connerton

Things appear to be moving slowly back toward the “old normal.” With all we’ve been through and have seen in the past two years, it is not too surprising consumer interest in fixed and fixed index annuities has grown.

The marketplace is paying close attention to two key retiree and preretiree concerns frequently mentioned by clients and consumers. One is, "Do I have enough saved for a comfortable retirement?" and two, "Do I have enough money to continue to last my entire retirement time horizon?"

For clients, the struggle of wondering whether they will outlive their assets is real, and it continues to be the top client concern around retiring. Fixed and fixed index annuities, with their guaranteed income benefit options, can put clients’ minds at ease because they provide an income stream that annuity owners cannot outlive. Plus, the value that they provide will continue to increase with the rising interest rate environment.

Annuities And Inflation

Consumer prices are rising – we see it at the gas pump, in the grocery store, in the housing markets, and in other areas where people spend their money. What message can financial professionals use to help clients understand how to preserve their retirement dollars’ purchasing power?

One option is creating a rising income stream in retirement (ideally to match or outpace inflation), or constructing strategies that segment specific buckets of money and trigger income benefits at different time periods and different deferral periods to create a ladder of income streams.

Looking at inflation - the Federal Reserve's target inflation rate is 2%, and recent headlines show inflation is significantly higher than the Fed’s target. That means that dollar for dollar over a 10-year period, clients will receive 20% less in goods or services for that same $1 bill that's coming out of their retirement income. This shows it’s important to build increasing income into clients’ retirement plans to maintain the same lifestyle clients are accustomed to over a 20-, 30- or 40-year retirement time horizon.

Annuities Of Today

Annuity product designs are very different than they were 10 or 15 years ago. Based on older product features, people still worry that grandma or grandpa will put all their money in an annuity, and if they died tomorrow, they will lose all their money (and any potential inheritance!) and that is not always correct or accurate.

That mindset comes from a word called annuitization. Annuitization is when you forego the cash value inside an annuity policy and it turns into a guaranteed income stream in retirement. However, even annuitized annuities today are different than they were 20 years ago, and there are significant advantages to annuitization, especially on after tax non-qualified assets. Today, there are cash refund, period certain and installment refund options that provide a death benefit value in the event of an unexpected or premature death.

For example: Your client deposits $1 million and takes out $500,000 in guaranteed income, then dies. With today’s product designs and death benefit features, there would be a $500,000 residual death benefit to the beneficiaries if a cash refund option is elected. Additionally, there are nonannuitized guaranteed income options on deferred annuities, such as index annuities with income riders. That is how the majority, if not all of the guaranteed income options on index annuities are now structured, as to not forego the underlying cash values.

The client can continue receiving guaranteed lifetime income off the annuity contract, while the remaining values are still invested in the index, still earning interest. That's an important point because index interest has the ability to preserve cash value while income is paid, which is the residual death benefit in an index annuity.

Annuities For Everyone And A Long Overdue Change

Retirement planning is a key topic for all Americans and it’s important to discuss the LGBTQ community as an underserved market in the world of retirement and financial planning.

Think back 10 years ago. What options did you have for a same-sex couple who wanted guaranteed income in retirement for joint lives? Simple answer – almost none! However, the Supreme Court ruling on Obergefell v. Hodges legalized same-sex marriage across the country. Insurance policies were updated to allow same-sex couples to have access to guaranteed lifetime income in retirement, which was long overdue and afforded LGBTQ couples the same solutions available to everyone else.

There are plenty of statistics available highlighting the difficulty LGBTQ individuals have in saving for retirement. A couple of key reasons: more often they are the caregivers for elderly parents, and they are less likely to have children of their own who could potentially support them in the advanced retirement ages.

These are just two contributing factors that hinder the amount of retirement savings that exist within the LGBTQ community. This is where financial professionals can step in and provide the guidance and planning for the next stage in their retirement time horizon.

With all the product changes made in recent years to the annuities offered today, with a little planning, tomorrow’s retirees should find themselves a comfortable position, knowing their assets are protected, they can’t outlive their income streams and, if they die prematurely, there could still be something left for their heirs and the next generation.

Brendan Connerton is director, annuity sales, Crump Life Insurance Services. He may be contacted at [email protected].