To provide income solutions, look to income productsArticle added by Bob Seawright on January 15, 2009
Bob Seawright

Bob Seawright

Joined: December 18, 2008

The numbers aren't pretty.

The stock market has lost more than 40 percent since its 2007 high. The S&P 500 Index began 1998 at 970.84. At the close of the year (12/31/08), more than a decade later, that index stands even lower, at 903.25. Media reports indicate that baby boomers have lost over $2 trillion in retirement savings during the recent market collapse alone. The confidence of Americans in their ability to afford a comfortable retirement dropped to its lowest level in seven years, according to the 18th annual Retirement Confidence Survey (RCS) conducted by the Employment Benefit Research Institute (EBRI). What's more, that report was completed before the most recent market disasters.

Clearly, now is a great time to promote safer money strategies.

A recent study from AARP found that "if the economy does not improve significantly, over six in 10 workers age 45 and older say it is likely they will spend less in retirement (69 percent) as well as delay retirement and work longer (65 percent)." Moreover, because of the economic downturn, one in five workers 45 and older has already stopped putting money into a 401(k), IRA or other retirement savings account during the past year. Finally, more than a quarter (28 percent) of respondents felt that their savings were not on track for retirement even before the economy slowed down, and nearly six in ten respondents (58 percent) think they are not saving enough for retirement. Take a look at the actual numbers from the Retirement Confidence Survey below. They reflect the total savings and investments (not including the value of the primary residence, which has also gone down) of today's workers by age group -- but before the recent market crisis:

Retirement SavingsAll Ages25-3435-4445-5455+
Less than $10,00036%49%33%29%28%
$250,000 or more12%2%8%20%23%

*Source: Employee Benefits Research Institute, "Retirement Confidence Survey," April 2008.

Given what has happened recently, merely suggesting that conventional retirement funding strategies will prove inadequate for many Americans is a dramatic understatement.

Current retirees "living on investment income... have no choice but to dial back... [their] withdrawals," an analyst at the investment firm T. Rowe Price recently told Newsweek, and said they should be focusing on preserving their tenuous retirement nest egg. Smart Money agrees. Unfortunately, for those looking to retire in the near future and who rely solely on investment accounts, recent market losses are "so severe that anyone planning to retire over the next five years should reconsider leaving their job," Smart Money says. "They may well need to work full-time well beyond their planned retirement age."

Life on the fixed side

But current retirees who own fixed and fixed-index annuities don't have to share those worries because their principal is protected. We are proud and fortunate to tell our fixed and index-annuity clients that despite the turmoil in the markets, every penny of their principal is secure. That's a great message anytime; and given what's happening in the economy and to the investment markets, it's an especially great message today. Advisors who have provided sound income planning using annuities can also tell their clients that despite ugly headlines, their income is guaranteed and their retirement remains secure.

Sadly, many advisors neglect to include annuities as part of their clients' distribution and income planning. Yet annuities are a crucial, even necessary, component of a successful retirement planning strategy. As they approach retirement, many clients, prospects and even advisors seem confused about the difference between accumulating retirement savings and creating an income plan. Today's retirees need to be concerned with both accumulating enough money to retire comfortably and how to make that money last for a longer time, perhaps 40 years. Yet when asked about their primary source of retirement income, a whopping 63 percent of those surveyed in the EBRI 2003 "Retirement Confidence Survey" responded with asset accumulation vehicles such as 401(k) plans and mutual funds, rather than with products like annuities, which are actually designed to provide dependable monthly distributions.

This misunderstanding is compounded by the risk of fast-depleting retirement assets, due to either volatile market conditions or reckless action. A 2008 survey conducted by the MetLife Mature Market Institute found that nearly 70 percent of consumers overestimate how much they can prudently withdraw from their savings during retirement, and a startling 43 percent think they can withdraw 10 percent or more annually.

Annuities provide ideal vehicles as part of an overall plan to address and meet retirement income concerns. For example, according to Investing Your Lump Sum at Retirement, from the Wharton Financial Institutions Center, trying to replicate the advantages of a lifetime annuity individually would cost a client between 25 percent to 40 percent more money because an advisor cannot rely upon an expected lifetime, as risk-pooling allows, but must look at every possible lifetime. Indeed, even at this higher cost, a changing investment climate could still scuttle the plan. In general, academic studies such as this one recommend "substantial annuitization" to guarantee 100 percent of a client's minimum acceptable level of retirement income. The recent months' events in our financial markets, combined with continuing economic uncertainty, further reinforce the value of including guaranteed income solutions within every individual's retirement plan.

Recent market volatility has certainly hurt a lot of people and has devastated the portfolios of many hopeful future retirees. But it has also created opportunities. If your practice includes fixed annuities, today is an ideal time to market to your annuity clients; their faith in your services will translate into repeat sales of safer money products, and should result in fertile ground for referral business. The climate for fixed and index annuities could not be better. If you have not used fixed annuities and other principal-protected products to guarantee income in retirement, you should not wait another minute before presenting these proven solutions to your client base.

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