More than anything else, Americans’ top financial worry is not having enough saved for retirement. Although there is one product that’s growing increasingly favorable, but hasn’t totally caught on… yet.
According to a 2014 Gallup poll, 59 percent of Americans are very worried or moderately worried about not having enough money for retirement. However, in a 2015 study conducted by TIAA-CREF, 61 percent of adults reported that they do not plan to buy an annuity.
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Seems surprising right? Annuities are an insurance product designed to protect retirees against outliving their assets and provide them with a reliable flow of guaranteed income well into their golden years. Yet only 28 percent of adults surveyed by TIAA-CREF had a favorable impression of them. What gives?
This phenomenon, which economists have described as the “annuity puzzle,” dates back to the mid-1980s. While the puzzle has provided a worthy opponent for agents of the past, there are several reasons to believe a solution nears.
Changes in society’s demographics and the supply and demand of annuity products have created the perfect recipe for favorable marketing conditions. Let’s explore how we’re entering the age of annuities.
A Steady Supply of Potential Clients
Currently, America is facing an unparalleled time in history. The largest generation to ever walk the earth has started to reach the age of retirement.
By 1946, World War II ended and society had already started to bounce back after the years of the Great Depression. After more than a decade of delaying marriage and childbirth due to the poor economic conditions and war, older Americans finally felt comfortable enough about bringing children into the world and younger Americans felt more eager to get married. As a result, for the next 18 years, birth rates became elevated and the largest cohort in United States history was born.
Approximately three years ago, the youngest of the roughly 75 million baby boomers climbed over the hill in age. In 2011, the oldest of the baby boomers turned 65. And over the course of the next 13 years, more people will be reaching retirement age than ever before. This is great news for agents selling annuities.
Annuities’ top selling point is that they are a great retirement strategy. With over 10,000 people turning 65 every day for at least the next 13 years, agents can expect a steady stream of potential clients.
The Ever-Increasing Longevity of Life
We’ve all heard this riddle before: What goes up but never comes down? It’s simple: age.
As it stands, only a few American women have defied expectations by living past 100 years old. While most people pass long before then, people are living longer than ever before, thanks to advances in medicine and modern technology.
In “Deaths: Final Data for 2013,” the Centers for Disease Control and Prevention (CDC) showed that the average human life expectancy has increased 25 percent over the last 73 years. The average life expectancy at birth for both sexes and all races and origins in 1940 was 62.9 years. Life expectancy increased to 68.2 years in 1950, 75.4 in 1990, and 78.8 in 2013.
In accordance with the increasing longevity of life, the number of years seniors can expect to live after retirement is also rising. Data from the 2013 CDC report suggests that those reaching age 65 can now expect to live almost 20 years after they retire. As a result, those over the hill will need a solid financial strategy in place to make sure they don’t outlive their assets.
The Increased Demand for Guaranteed Income
Nowadays, traditional defined benefit pension plans are few and far between, and relying on Social Security checks alone won’t allow most retirees to maintain the standard of living to which they’ve grown accustomed. Many pre-retirees and retirees realize that running out of money is a real possibility. In order to avoid this scary scenario, more and more older adults are looking for safe ways to increase their post-retirement guaranteed income.
Social Security checks alone won’t allow most retirees to maintain their old standard of living.
The aforementioned 2015 TIAA-CREF survey found 84 percent of adult participants reported having a guarantee of monthly income for the rest of their life is important to them. Additionally, 48 percent believed that having guaranteed income should be the primary goal of a retirement plan.
How do they plan on attaining more guaranteed income? While it seems they themselves aren’t so sure, one thing’s fairly certain: they don’t want to splash around in the stock market.
After listening to passed-down stories of the Great Depression, experiencing the Great Recession of 2008, and hearing whispers of investors’ predictions for a 2015-16 stock market crash, older generations fear risking their money in markets. A 2013 Allianz Life survey found that 87 percent of people aged 55 to 65 were more interested in a financial product with a 4 percent guaranteed return than one with an 8 percent return that could decrease in value due to declines in the market.
In their attempt to gain peace of mind and assuage their fears about the future, older adults are looking for low- to moderate-risk investment options that have decent growth potential. In other words, they’re searching for products like annuities.
Interest Rates Well Worth the Wait
It’s no secret that the overall interest rate environment has been in poor condition. Consequently, older Americans have realized that they must make smart choices when it comes to investing their money. Right now, annuities are one of the safest and smartest investment choices available to investors.
Consider a five-year CD or a five-year treasury. These two investment options might pay out approximately 1.5 and 1.7 percent, respectively, in annual interest. Alternatively, a five-year annuity will pay out around 2 to 3 percent in annual interest. Moreover, with fixed index annuities, investors may accumulate more interest if the market rises while experiencing no loss if the market takes a turn for the worse.
Right now, annuities are one of the safest and smartest investment choices available to investors.
Just as good, annuities are also tax-deferred. Earnings on CDs are taxed annually, limiting one’s true gains. Conversely, earnings on annuities are taxed at your regular income tax rate. The principal money invested, and the interest generated, compounds annually. And unlike 401(k)s and IRAs, which are also tax-deferred, there is no annual contribution limit for annuities.
Out of all “safe” investment options, fixed annuities are the product for which investors may be able to get the most bang for their buck.
Better Products Than Ever Before
In the past, many people avoided annuities. Why? They knew that once they handed over their handsome chunk of change, they would never again be able to access it in full. Also, they knew that if they happened to die prematurely, their remaining assets would go to the insurance company and not an heir of their choosing.
Now, many companies give investors more options in the form of riders and additional benefits. For additional cost, investors can add riders to customize their package when it comes to liquidity, exit opportunities, and death benefits. Furthermore, over the past few years, the industry has developed more income-focused, hybrid-style products. For example, shoppers can now purchase fixed deferred annuities and add Guaranteed Lifetime Withdrawal Benefits riders at an additional cost.
Throughout the last 10 years, insurers have adapted to accommodate peoples’ desires. With the emergence of riders, new products, and other additional benefits, annuities have more flexibility and security than ever before.
A Promising Future
When mining out a sales career, one of the most important questions to ask is if future generations will remain interested in a product. A 2015 survey conducted by KRC on behalf of TIAA-CREF found that annuities have already caught Generation Y’s attention.
The survey, which involved 1,000 adults aged 18 and older, found that 14 percent of those aged 18 to 34 years old have already purchased an annuity. This is the same percentage of baby boomers aged 55 to 64 who have purchased an annuity, and almost two times the amount of those in Generation X who have purchased an annuity (8 percent). Furthermore, 18 percent of the 18- to 34-year-olds who reported they hadn’t purchased an annuity, stated that they plan to do so before they retire.
The future has never looked brighter for the annuity market. With graying demographics, the increased demand for guaranteed income, the development of new and improved annuity products and options, and the annuity-mindedness of the younger generation, agents in the annuity market can expect to have a successful selling career.
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A modified version of this article was previously published in the March 2016 issue of California Broker Magazine.