25 years of market volatility: How annuities can provide certainty in troubled times
By Lou Aarons
Delaware Valley Financial Group
There is no “one size fits all” any more. If you haven’t already done so, expand your horizons. Different companies are focusing their products on different niches.
On October 19, 1987 the Dow Jones Industrial Average plunged 23 percent. I’m sure many readers aren’t old enough to have paid attention and some of you weren’t even born yet, but many of us do remember that day. An economy that had been recovering from the crazy early 1980s (remember 16 percent CD rates and a 20 percent prime rate?) was showing signs of slowing down and there were discussions about higher taxes. Many computerized protections were put into place to prevent future panic selling like what occurred that fateful day.
Fast forward to the tech bubble that burst in the spring of 2000, sending the market into a two-year tailspin. How many equity portfolios, including 401(k)s and 403(b)s, suffered 30 percent, 40 percent or even 50 percent declines?
A short six years later in 2008 came the worst financial crisis since the Great Depression. While the cause was hotly debated, the effect was painfully clear; a 34 percent retrenchment in the Dow and a beleaguered public that finally became very wary of the markets. Nearly half a trillion dollars has been pulled from U.S. equity markets since 2008 and trading levels are at their lowest point since then, according to data compiled by Bloomberg.
Then there was the “flash crash” of May 6, 2010. Again, according to Bloomberg, nearly $900 billion in value was wiped out in about 20 minutes. Computerized circuit breakers weren’t triggered. Yes, U.S. stocks are in the 44th month of a post-2008 bull market, but the Dow remains 23 percent below October 2007 market peak levels. Many of today’s headlines sound ominously like October 1987, the economy is slowing and tax increases are on the horizon.
The only constant seems to be volatility. Extreme volatility. There have been substantial up markets surrounding these bad times. The very long-term investor has been handsomely rewarded for their patience and fortitude. But what if you’re not a very long-term investor? What if retirement is around the corner for you? What if you are already retired? The timing of market volatility could ruin 40 years of planning and derail your dreams of a comfortable retirement. There really is only one question that needs to be asked: Why take the risk?
More than ever, clients are looking for certainty and guarantees, exactly what annuities provide. Multi-year guarantee annuities can function as CD alternatives with better fixed rates for fixed periods of time. Index annuities can satisfy the client who is tired of the market roller coaster ride but wants the opportunity to get better returns, over time, than traditional fixed rate CDs or annuities. Income riders are surging in popularity as pre-retirees, and even some current retirees, are looking for future income certainty amidst a dramatically uncertain market. There is real comfort in knowing exactly what income you can receive from your account at specific times in the future. And, perhaps even more important, knowing that the income stream is guaranteed to last for your client’s lifetime and even their spouse’s lifetime as well. Yes, that income stream can even increase with inflation over the years.
What’s the bottom line? The market has proven to be a scary place for even the most seasoned investor who is looking to protect their financial health in retirement. Fixed and fixed indexed annuities can provide the solutions to some very pressing needs. Like women’s fashion, there are many different styles to fit the occasion. Long-term, short-term, fixed rates, market based rates, lifetime income riders, enhanced death benefits. You need to know them and you need to make sure you educate your client about the options. There is no “one size fits all” any more.
If you haven’t already done so, expand your horizons. Different companies are focusing their products on different niches. The company that offers the best income rider payout may not necessarily have the most diverse crediting options and best caps. Conversely, high bonuses and high caps don’t signal the best income rider. Once you understand what your client wants to achieve, you can roll out the appropriate product. Utilize your FMO to help you know what you should be recommending to the client. That, truly, is what we are here for.