There’s no doubt about it—annuities are hot right now: in
March 2022, LIMRA reported record-high annuity sales, with total sales in the
U.S. increasing 4% to $63.6 billion between Q1 2021 and Q1 2022, and fixed
indexed annuity (FIA) sales up 14% over Q1 2022. Options like FIAs are an
increasingly attractive retirement planning solution, offering principal
protection and steady growth.
Nationwide’s Advisor Authority study found that 89% of
advisors say they are likely to choose an annuity to protect against outliving
their savings, however just over half (58%) of investors say the same. So, what
is holding them back?
As we mark National Annuity Awareness Month (NAAM) this June
amid rising interest rates, increased market volatility and heightened interest
in annuities, now is the time to talk to your clients about incorporating
annuities into their financial plans. Below are some common investor
misconceptions and ways you can address them with your clients to solve the
annuity puzzle together.
Myth 1: Annuities are too costly. As traditional pension
plans become increasingly rare, options like 401(k)s have become more popular.
However, it’s important for your clients to understand defined contribution
plans are tied to the markets, making those investments vulnerable to market
volatility, which could potentially devastate their retirement if it strikes at
the wrong time. Annuities, on the other hand, function as an insurance product,
and while some may have underlying investment options that are tied to the
markets, they also offer guaranteed income and have features that offer a level
of protection during market fluctuations.
It’s not surprising that the process of understanding the
sometimes-complicated annuity fee structures may feel overwhelming to those
less familiar with these types of solutions. That’s why it’s important to
invest time helping your clients understand various annuity options and the
fees associated with each one. But it’s just as important to underscore what they
receive in return for these additional expenses—a level of downside protection
and income guarantees that will help make their retirement more predictable.
Myth 2: Annuities are only for older, high and
ultra-high-net-worth individuals. While it’s true that many people who own
annuities tend to be more affluent and closer to retirement age, recent data
indicates an appetite among more of the population. According to the Alliance
for Lifetime Income, 62% of annuity owners have less than $500,000 in investable
assets, and 46% are middle class, earning between $75,000 and $150,000
annually. In addition, interest in annuities among younger generations is
growing, with more millennials choosing an annuity to protect against market
risk year over year (85% in 2021 vs. 72% in 2020) according to Nationwide’s
Advisor Authority study.
As you work with clients at all stages of the financial life
cycle, note that a lengthier annuity accumulation phase means more time for
investments to grow, leading to the potential of greater principal growth and
higher payouts in retirement.
Myth 3: There is a right (or wrong) time to purchase an
annuity. In any economy, and at all stages of the financial life cycle,
annuities can provide protection and guaranteed income. This is an attractive
proposition in today’s economic environment, but it may not have felt as urgent
for some investors during the recent decade-long bull market. The bottom line
is, annuities help clients prepare to navigate adversity in the future, which
is impossible to predict. Given this unpredictability, having the opportunity
to participate in a portion of equity market gains while having limits on
market losses can be very appealing to investors today.
While there is no right or wrong time to buy an annuity,
these solutions can be tailored to unique goals and circumstances. For example:
• High earners and the high net worth, who can easily max
out qualified plans, may want to take advantage of the contributions afforded
through an investment-only variable annuity (IOVA).
• A fixed indexed annuity (FIA), can help guarantee that
investors will not lose any of their initial investment or credited earnings
due to the performance of underlying indexes, offering more flexibility and
choice to advisors and clients navigating today’s complex markets.
As always, the key is to work closely with your clients to
determine what makes the most sense for their individual situations and
objectives.
Myth 4: As they say, nothing is certain except death and
taxes—there is no way retirement income can truly be guaranteed. Yes, the
income is truly guaranteed. Remind your clients that an annuity is a contract
with an insurance company, so the guarantee of future payments is based on the
financial strength of the insurer.
Note that insurance companies are highly regulated, with
independent agencies routinely assessing and rating the financial strength of
providers. Even following the profound effects of the 2008 financial crisis,
the impact on most insurance companies and their policyholders was limited,
with a few exceptions.
A turbulent economy can lead clients to reevaluate their
retirement planning strategies. As financial conditions evolve, encourage
clients to explore various retirement solutions and products, including
annuities, as part of a robust plan that helps them protect investments, enable
growth and guarantee they won’t outlive their income.
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