“Those who cannot remember the past are condemned to repeat it.”—George Santayana
In late December congress passed the most sweeping overhaul of the tax system in over 30 years. That news, coupled with last year’s double-digit market gains and low volatility, has bolstered many Wall Street analysts to forecast the S&P 500 will reach 2,800+ by the end of 2018, and optimistically predict that the current bull market will become the longest in history in August of this year. As always, there are contrarians with more pessimistic outlooks. How should this news affect a conversation with your clients and prospects nearing retirement and protecting their accumulated gains earmarked for retirement?
One only needs to recall the Tech bubble of the early 2000s, followed by the housing bubble/credit crisis of 2007-2009, and the impact on retirement savings and 401(k) balances. Thousands of people near or beginning retirement had their financial futures turned upside down, and many more were forced into retirement due to circumstances beyond their control. Older workers fortunate enough to continue earning a paycheck had the luxury of postponing retirement, while many others faced the dilemma of an unexpected, forced, retirement and having to tap their already beleaguered nest egg just to survive.
Add to this recipe the uncertain economic future of Social Security obligations, changing worker demographics to support it and the crush of Baby Boomers now entering retirement, and you begin to sense the economic impact the next market correction could have on aging Americans.
The FIA Value Proposition
Our older clients who have learned from history, or are at least wary of it, usually fit a more conservative risk profile when it comes to their retirement savings. For over 20 years the fixed indexed annuity has offered this basic value proposition: Upside interest crediting potential linked to gains in a market index with no direct exposure to downside market risk.
The value of this proposition is greatly magnified for those boomers nearing retirement who don’t have the luxury of a 10, 15 or 20+ year time horizon to recover market losses. For them, the ability to lock in and protect previously credited interest credits in exchange for a portion of the total market upside is an important and attractive benefit. Consider this simple example: If your investment suffered a 30 percent market loss in the first year, you would need a 43 percent gain in the following year to get back to your original account balance. While these kinds of losses and gains are extreme, ask any fixed annuity veteran who experienced the economic crisis of 2007-2009 if they helped prospects who suffered these kinds of losses in accounts exposed to market risk. Anyone remember the joke at that time, “My 401(k) is now a 201(k)?”
This protection from market loss is one of the greatest benefits of this unique annuity product. While fixed indexed annuity clients might experience a zero return year, they will never lose previously credited account value regardless of how the market performs. (A number of carriers provide great marketing pieces to illustrate this concept. Please contact me if you would like a copy.) We are all able to help our FIA clients cheer the market on to new heights since we would expect the various index-linked interest crediting options available to perform better in a rising bull market, but clients that experience a significant market decline appreciate the principal-protected safety of their investment from market risk.
FIA Accumulation Features for Income Later
As mentioned earlier, the evolution of fixed indexed product design now spans more than 20 years. During that time new strategies for guaranteed income benefits have been developed to help consumers create more predictable retirement income streams. These income riders are offered with most of today’s FIA products and guarantee a lifetime income stream you can trigger at some point in the future. These riders grow (or “roll-up”) the income account value of the contract at a specified rate, usually between five and eight percent and lasting seven to 20 years. It is important to note that the value of this income account is only used to determine the value of income payments and not available as a lump sum.
Income riders can be useful planning tools in helping clients guarantee their desired monthly income goal. Based on the contractual guarantees of the rider, what is the least amount of premium required to help our client achieve their desired income level? Beware of the contractual provisions and crediting methodologies found in fixed income annuities and the various income riders. We have discovered, and can illustrate, that the highest roll-up percentage or longest roll-up period do not automatically generate the highest guaranteed income for the client. In fact, certain carriers/products seem to have performance “sweet-spots” depending on the client’s age, deferral period before income is taken, and joint or single income. This information is critical in finding the best solution to recommend for your client’s specific goals.
Accumulation for Potential Chronic Care Issues
The Social Security Administration reports that the average 65-year-old woman alive today can expect to live to age 85 and 65-year-old males to age 83. In addition, one in ten will live past age 95. With this increase in longevity, clients should consider the impact chronic health issues could have on their financial security later in life.
Unfortunately, many consumers with long term care policies have experienced frustration with increasing premiums, reduced benefits, and carriers that have left the marketplace. With the rising costs of medical care, self-insuring is an option only for the very affluent or those gambling that they will fall into the estimated 30 percent of the population that will avoid some kind of long term care need eventually. Are there any other options to protect financial stability and afford assistance in the event of a chronic care issue?
Annuities with chronic care riders that provide an enhanced benefit if you are unable to do two of the six ADLs (Activities of Daily Living) continue to gain popularity. Many times these riders feature a multiplier that doubles or triples the premium available in the event of a chronic care event. This means a $100,000 initial premium could amount to $200,000 to $300,000 available for qualifying health issues. If the client does not utilize the chronic care features, the annuity contract and premium still can provide income or estate planning benefits.
Our principal-protected insurance products continue to evolve and provide benefits, guarantees and flexibility that would amaze earlier generations of Americans. We still have 10,000 baby boomers reaching retirement age every day, needing assistance in protecting their financial futures. Make the decision that today is the best time ever to be in the senior market helping clients prepare for retirement—and have a phenomenal 2018!
