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Why Retirees Feel Unprotected

Jacqueline Sergeant
November 22, 2021

Financial Advisor

Why Retirees Feel Unprotected

There was a time, not so long ago, when many Americans felt comfortable planning for a 15- or 20-year retirement. Of course, they had pensions, they felt good about the viability of Social Security, and interest rates were robust.

Today, pensions have all but disappeared, Social Security is on near life support, and interest rates continue to hover near historic lows, making retirement income planning even more challenging.

And baby boomers are feeling the brunt of it. “So you have a large group of individuals that are moving into retirement that are less protected than the previous generation and are expected to live longer than any other generations,” says Scott Stolz, head of insurance solutions at SIMON Annuities and Insurance Services LLC in St. Petersburg, Fla. He notes that this wave of new retirees is the first group of individuals who do not have pensions en masse.

Stolz, who previously served as president of the insurance and annuity division of Raymond James, also points out that boomers have gone through a few notable financial lows, beginning with the dot-com bubble from 2000 to 2002, which Stolz notes was not that big a deal because they were still young. But then there was the financial crisis, between 2007 and 2009, which scared many people. And as boomers were nearing retirement, they had to deal with the 30% drop in the market in March 2020 during the pandemic (thought it has since recovered).

“But they are now at a point in their work life that they cannot go backwards,” Stolz says. By that he means looking at risk the way they did when they were younger: People don’t get as much benefit from getting another 15% to 20% on their retirement portfolios at this point—they’re more afraid of losing 15% to 20%. “You have got this entire generation who is now looking to protect what they built.”

And if recent sales are any indication, many people are turning to annuities for that protection. After the products faced several tough months last year because of the pandemic, annuity sales rebounded in the second quarter of this year to a record $68.2 billion, a 40% increase from last year, according to the Secure Retirement Institute’s U.S. individual annuity sales survey. Third-quarter total sales fell off a bit but remained strong, at $62.2 billion, up 12% from the third quarter of 2020. Year to date, annuity sales have increased 19% to $191.4 billion, the highest figure for the first nine months of the year since 2008, SRI said.

Todd Giesing, vice president of SRI Annuity Research, says there are a few noteworthy factors in the recent sales trend. “When you look at the sales of products, we are seeing a significant amount of the growth in 2021 coming from what we call protection-based products,” he says, explaining that these products include registered index-linked annuities, fixed-rate deferred annuities and other products like index annuities that do not have a guaranteed living benefit.

He says the sales also reflect pent-up demand. Last year, he notes, people’s priorities were on family, not financial and retirement planning. “We are starting to see people get back to a sense of normalcy and put more of the focus back on the steps that they normally would have taken for retirement planning.”

But retirement planning has become a problem, says David Lau, CEO and founder of DPL Financial Partners. Safe forms of funding retirement have basically gone away, he says, so people will be looking to self-fund their retirement for a third of their lifetime in a low-interest-rate environment. “And if you are looking at investing in a 10-year Treasury, you are only going to get 150 basis points at this time, and that’s not going to fund much retirement, sadly,” he says.

Lau says his firm is seeing portfolios with heavier equity balances, at 70% or even 80%, because the 14-year bull market has spurred equity accounts to grow and because people have shied away from the low yields in fixed income. Those low yields have also prompted people to move from bonds to alternatives. “So clients are getting more risks in their portfolio on both sides and that’s a real problem,” he says. “Should the bull market stop running, as they say, I think it’s going to be bad for a lot of retirement portfolios.”

 

Increasing Portfolio Risk
He cites a recent study by BlackRock that examined 20,000 advisory client portfolios and found that the amount of risk in them had increased by 25% just in the past two years. “That is staggering,” Lau says. “Advisors have to start looking at ways to de-risk their portfolios.” Moving to bonds is, again, difficult because of the yields, he adds. “But annuities can provide that downside protection along with a really nice income, and there are many types of annuities out there.”

Stolz posits that financial advisors, especially veterans, see themselves more as investment professionals than retirement income planning professionals, so they believe they can manage the risk themselves without outsourcing it to an insurance company by using annuities. “But retirement has changed, and retirement income planning is way harder than building a portfolio in retirement,” he says.

Advisors have long derided annuities as complex. Ken Fisher, the founder and executive chairman of Fisher Investments, has denounced them as not only being difficult to understand but says the contracts favor the companies that write them, not the customers. Most of them are bogus, he wrote in a 2019 article for USA Today. “All but simple immediate fixed annuities should be outlawed because buyers almost always misunderstand what they’re buying. It’s one step from fraud.”

But Lau says he and his colleagues are seeing “good advisors” making prudent pre-emptive moves and shifting to use annuities, which he says efficiently generate income. Also, “they provide risk mitigation, they pay you income for life that helps with longevity risks, and they pay you income without having to sell equities, which helps prevent sequence risks,” he says.

One of the only bright spots in the annuities space during the height of the pandemic was registered index-linked annuities, also known as “RILAs.” These are also known as “buffered annuities,” since they offer users exposure to indexes. They act as a cross between a fixed-income annuity and a variable annuity, providing attractive capped returns and downside protection. Registered index-linked annuities posted third-quarter sales last year of $6.4 billion, a 33% increase.

The year-to-date sales have reached $15.8 billion, up 26% from 2019 results, says the Secure Retirement Institute. Second quarter 2021 sales topped $10 billion, an increase of 121% over the same period a year before. And in the first half of 2021, sales for registered index-linked annuities were $19.2 billion, up 104% from the previous year. Preliminary third-quarter results are showing another strong finish for the products. SRI reported sales of $9.2 billion, up 47% from third quarter 2020.

The registered index-linked annuity “is the real star in the annuity space right now, and it really make sense because at their core the RILA products provide the end customer the downside protection that they want with upside protection they need,” says David Hanzlik, vice president of annuity and retirement solutions at CUNA Mutual Group. “The ability to provide the downside protection is important to people that are using these solutions, but that upside potential has been what’s captured everyone’s attention.”

Fixed-index annuities, or FIAs, also have posted big gains over the last few quarters, says Giesing. These vehicles posted $16.5 billion in sales in the second quarter, a 38% jump from the previous year. Year-to-date sales were $30 billion, up 6% over the first half of 2020. Preliminary third-quarter figures show sales continue to be strong, growing 30% to $17.1 billion—marking the highest quarterly sales in two years. Fixed-index annuity sales were $47.1 billion in the first nine months, up 14% from the prior year.

“I think overall, the theme of protection is going to be with us for a while, and I think people are still going to have that uneasiness in looking for that balance of growth and protection while it’s expected that products like RILAs and FIAs will continue to do well,” Giesing says.

Another popular option is multi-year guarantee annuities, which act like certificates of deposit, but with tax deferrals, Lau notes. These “are popular because they are completely simple,” he says. “You buy it. It’s a four-year term, and you get paid 2.75%,” making it an attractive option.

Critiques aside, there is a growing appetite for annuities. A recent study by J.D. Power revealed that customers have begun to bypass advisors and insurance agents to engage more with annuity providers on websites and other digital platforms. And that has helped to drive an increase in overall customer satisfaction.

The bottom line is that the products meet a demand, says Stolz. “People in retirement don’t want to have to worry about whether they are going to run out of money or whether they are going to have unexpected expenses that they can’t cover.” 

The supposed complexity of the products requires more education on the advisors’ part, says Lau, but he argues that advisors should be able to understand the products and explain them to clients. At the same time, he says, carriers will need to focus on simplicity when building newer products. They are used to building annuities with special features they can sell, he says. “Let’s bring them back to simple products that people can easily understand and use,” he says. “Because the fundamental structure of annuities has been around since the Roman times. It’s a very good and well-proven structure that has just gotten bastardized by commissions.”

Hanzlik also says simplicity is key. CUNA Mutual Group was one of the early entrants in the registered index-linked annuity space and one of the first to launch the product with a guaranteed living withdrawal benefit, and Hanzlik says the firm has been successful because the products offer a simple-to-use and understand solution.

“Our focus on simplicity, we think, will continue to differentiate us,” he says. “Our RILA solution has been very straightforward, and that’s the feedback we get from advisors. He notes that sales of the firm’s RILA offering with income is up 200% year over year.

As the market for RILAs grows, Giesing says the Secure Retirement Institute is keeping an eye on the guaranteed living benefits added to the product. That’s expected to be an area for growth and opportunity. “Right now, it only makes up about 7% of the RILA sales, but we are starting to see more companies dip their toes into the water.”

The institute is also closely eyeing the fee-based annuity market. It’s something everybody wants to talk about and implement, he says, though nobody wants to put the infrastructure in place. But some of the operational problems faced by distributors, advisors and manufacturers have been alleviated by new technology.

“So we think that there is a potential there that we will see more advisors and distributors switch to fee-based efforts on annuity solutions as we move forward.”