Consumers want what annuities deliver, but they are still not sure they want the annuities themselves.
That is the essential contradiction a LIMRA survey uncovered. The poll also uncovered why some annuities have been breaking sales records lately.
An overall key finding is that although annuities have come a long way in consumer acceptance, they are still far from being perceived as safe an investment as a bank product, said Matthew Drinkwater, associate managing director, LIMRA Secure Retirement Institute.
“This study shows that there’s this discrepancy between wanting lifetime guarantees and not really accepting annuities,” Drinkwater said.
LIMRA analysts and other observers have differing ideas about the disconnect and how to repair it. But what needs no argument is consumers’ anxiety about their retirement income.
LIMRA’s study, “Finding the Right Mix: Retirement Income Attitudes and Preferences,” found a theme in the two top goals named by respondents. Those goals are: “have enough income to last a lifetime” and “remain financially independent.” Of the “have enough income” goal, 71 percent named it one of their top three concerns, and of “remain financially independent,” 69 percent identified it as one of their top three. These two goals far outpaced the third-highest goal, which was “stay and live in your own home,” at 39 percent.
The survey also found that only 20 percent are very confident that they will be able to live their desired retirement lifestyle. Nearly the same proportion, 19 percent, felt that they were not very or not at all confident. In between, 61 percent were somewhat confident – not exactly a ringing sense of security.
Among the nervous 19 percent, the leading concern was the overall state of the U.S. economy, at 74 percent. Agents and advisors cannot do much about that, but they can address the next three concerns: “have not saved enough for retirement,” 64 percent; “will not receive sufficient or any pension income,” 43 percent; and “will not receive sufficient Social Security income,” 42 percent. In fact, agents can assist with all of the remaining concerns, which are displayed in an accompanying chart.
People know they need a dependable stream of income to sustain their retirement lifestyle – as they revealed with their top goals. They also know what they want in their investments. But these goals and desires might not be so compatible. They want an income amount that has “the potential for investment growth,” at 60 percent. But they also want an amount that can be changed as their needs change (55 percent), income guaranteed for life (52 percent), the ability to occasionally withdraw more than the regular payment (51 percent) and the income to adjust for inflation (50 percent).
These results might be expected from an older population that has had some wild rides over the past half century. There was the inflation mountain of the late 1970s that followed the economic tumult earlier in that decade, and then fiery explosions emitted by the equity bubbles that seem to pop every 10 years or so. Top that off with the spectacle of the shooting star-like stock market and you have a bulky package of high expectations and deep anxiety.
LIMRA chief executive officer Robert Kerzner said those dynamics have been evident and growing for the past several years.
“It’s consistent with research we did as far back as six and eight years ago,” Kerzner said. “On the one hand, people want control of their dollars. They want that flexibility in case things change. But now, especially with the stock market rising, they also want that upside and they’re afraid of losing out. And then they read stories that tell them with interest rates low, now’s not the time to lock in.”
But interest rates have been low for several years and will flat-line for as long as prognosticators’ eyes can see. Consumers are only now fully appreciating that the economy has fundamentally changed and that low interest rates are not temporary.
Long after the phrase “the new normal” came and went, we are living in that reality. Five years after the official end of The Great Recession, Americans are becoming more convinced of the new normal, according to a study conducted by The John J. Heldrich Center for Workforce Development at Rutgers University.
The Rutgers study found that 71 percent of Americans polled in August believed the recession left the economy permanently changed, compared with 49 percent in November 2009 – six months after the recession ended.
That survey also found that 70 percent are insecure in their jobs and 68 percent are highly stressed. They also have lost confidence that the government is coming to the rescue, with 78 percent in August expressing little or no confidence that government can help. That is up significantly from 49 percent in January 2013.
Financial pundits have been sounding the alarm about two of the three legs holding up the retirement planning stool. Americans are hearing them. The Rutgers poll now shows that most people have little confidence in their employers – who support the pension leg – and their government, provider of the Social Security leg.
The wobbly retirement planning stool calls for Americans to do it themselves. After all, ours is a nation of Home Depots and Lowe’s Home Improvement stores.
But, in a sense, Americans tried to do it themselves with real estate and the stock market. And we know how that ended up. Kerzner said that experience formed another feature to the new normal landscape.
“People remember the downturns when they saw 20 to 60 percent of their assets disappear. So, they also said, ‘Wait, I want that guaranteed income,’ ” Kerzner said, explaining LIMRA’s survey results. “Pre-downturn, it was all about building the pile of money. Now, they’re also worried about the check in the mailbox. But ‘I want both’ is making decisions really difficult for them.”
Clarion Call for Annuities?
As Americans awake in the new normal, they see a stock market that seems endless, but they also have the scar tissue from falling off one or more of those previous “never-ending” climbs.
So, where can consumers put their money for safety and upside potential? Annuities are an obvious answer, but it’s not so apparent to the general public, Drinkwater said of his study.
“A lot of that has to do, frankly, with ignorance,” Drinkwater said of consumer perception of annuities. “They hear conflicting things about what annuities are, what they do and their cost.”
They also worry about control. In fact, that concern over control appears to be the first major hurdle that a salesperson or process would need to overcome.
Drinkwater suggested turning the negative perception of control into a positive.
“One approach is the concept that it [loss of control] is actually kind of a good thing in the long run,” Drinkwater said. “You have professional management of your money, so that’s not going to be something that you’re going to be wrestling with when you’re 85. You don’t have to have your no-good daughter-in-law or someone else manage your finances. It’s professionally managed. You will always get that check. Don’t worry about that aspect of it.”
When clients say they are worried about being able to control their finances if “something happens,” then that’s an opening to discuss other products and strategies.
“If someone asks, ‘What about health care and things like that?’ then that becomes an opening for a more comprehensive discussion like, ‘Well, there are some income streams that we will align with certain needs – basic living expenses perhaps or other nondiscretionary needs.’ Then we can set up some funds that are in reserve and other funds that are for discretionary needs.”
That is a general approach that two financial and insurance professionals said they favor. They agreed on the holistic approach and starting with the control concern. But their tactics differed on addressing it.
John Olsen sold annuities as a financial advisor for decades until he started consulting and writing about the products and sales practices. Among his many endeavors, he co-wrote The Advisor’s Guide to Annuities. He favors a direct approach to realigning a client’s perception of control.
“It’s a control issue, because annuitization is the forfeiture of almost all control over the lump sum,” Olsen said. “So, that’s not attractive. Most annuitization is irrevocable and that tends to be something that almost everybody hates. It is basically a mindset problem.”
Clients approach the need for retirement income as retaining a lump sum and spinning an income from that, in Olsen’s observation. They do not see it as buying an income stream.
Identifying that mindset is a challenge for advisors. Olsen recognized that line of thinking when clients started asking about return.
“The idea of purchasing the income directly just doesn’t seem to get into the consciousness of most people, and that’s the problem,” Olsen said. “It is just swapping a capital sum for a guarantee of income, and the problem is that you have people asking, ‘What’s the internal rate of return [IRR] on that?’ And that’s the wrong question to be asking.”
What should clients be asking? Or, more precisely, what should advisors be asking clients at that point? “Do you want an income?”
According to Olsen, if clients say they want an income at 95 years old, that should be the goal of the conversation: “Then, what the heck difference does it make what the internal rate of return is?”
The advisor can then remind the client of the real objective. “If you want an income, I’m here to secure you an income, but you have to stop thinking that you don’t want to give up the cost of the income,” Olsen said. “If you buy a car, you don’t get to keep the money you use to buy the car. But people want to say, ‘I’m buying an income stream, and I want to retain control over the money I use to buy the income stream.’ That’s the problem.”
Curtis Cloke, a financial advisor focusing on retirement income, has a term of endearment for those clients: asset-hugger.
“What’s an asset hugger? ‘I love to pet, smell and taste my money every day of the week,’” said Cloke, who is well-known for speaking on advisor strategies. “The problem is, when I need to control my money emotionally, I’ll have to hold that money hostage to a very low yield. In a situation where I’ve got a million dollars and I need $30,000 of income with my Social Security, technically I have control but I really don’t because I can’t disturb my $30,000 of income.”
That scenario illustrates why control is an illusion for many retirees. They cannot touch the money in order to get the most return from meager interest rates. Consequently, Cloke sees that clients come to him with control issues of a different sort: they are leashed by fear.
“These clients walk in with many fears, but there’s one fear that’s No. 1 and it really doesn’t matter if they’ve got a half a million dollars or $10 million – it is universal,” Cloke said in describing many of his first meetings. “And that is, ‘Do I have enough?’”
Clients often go to Cloke when they have accumulated most of what they can expect and now want to know if reality matches their dreams.
“‘Do I have enough to sustain the movie of my retirement that I’ve been playing in my mind now for years?’” Cloke said, describing his clients’ fear. “They don’t know. Nobody’s ever mapped that number out.”
The answer to their situation might be an annuity, but Cloke does not reveal that option at that point. Just as the LIMRA study pointed out, clients need to buy into the benefits of an income stream before even considering purchasing an annuity.
“I’ve said, ‘Here’s Plan A and it’s assuming all the risk of a traditional retirement strategy,’” Cloke said, describing what he calls the SWIP strategy – systematic withdrawal income plan. That’s consuming the asset and hoping market performance cooperates.
“And then here’s Plan B, which is a secure income solution where you basically buy the income, invest the difference,” Cloke said, describing an asset mix that includes annuities. “We take a lot of risk away, eliminate a lot of fee drag and create a lot of tax efficiency. I actually contractually provide the cash flow that meets the movie in the mind. I also show them that they don’t give up performance, and their legacy balance is no more and maybe no less. And I still haven’t mentioned product.”
Clients are often relieved about the clarity and security of Plan B. They finally see a dependable way to ensure that their dream retirement can come true or what they need to adjust for reality. Now they know – and they want. Then comes the next question: “How safe is Plan B?”
The Annuity Plan
That question leads to laying out the plans, products and implications. Cloke might first clarify Plan A to compare it with Plan B.
“Most of these clients today in a high tax bracket are predominantly in municipal bonds,” Cloke said. “Those higher-net-worth clients are getting an income stream based on the average coupon rate of three percent or below. For every million dollars in that portfolio, they’re getting an income of $30,000 a year.”
Then comes Plan B: “But I can turn that three percent distribution rate into six-and-a-half percent – which I can do today, every day, all day long. Suddenly, I don’t need a million dollars held hostage to finance the $30,000 of income anymore. It’s less than a half million. As a 65-year-old, I can invest the rest over my entire 30-year retirement period and end up with more than a million dollars left to my legacy. I create a deficiency, but I’ve preserved enough assets young enough in their life that I can preserve great legacy at the same time.”
That’s when the discussion about annuities and the safety aspect of the different products occurs. Even though annuities are all about safety in the need they serve, along with how they are built and maintained, consumers perceive otherwise.
Many consumers recoil at the word “annuity.” They also don’t trust companies to deliver the guarantee, according to the LIMRA survey.
Cloke said advisors can reposition annuities and allay clients’ fears. He uses “pension envy.”
“We have a long way to go to get the word ‘annuity’ out of the gutter,” Cloke said of advisors’ difficulty of talking about the products straight on. “But people have what I call pension envy. They liked it when they worked a job for 30 years and walked out with a guaranteed income they couldn’t destroy or outlive.”
Cloke noted that compliance officers and at least one state, Colorado, do not allow annuities to be called private pensions. Regulators don’t seem to understand that when people leave a company and collect a pension, most companies find commercial insurers, off-load the responsibility and annuitize the lump sum.
“They have no problem calling that a pension,” Cloke said, adding that advisors can describe the pension-like attributes of an annuity. “You can talk about how a particular investment allocation meets the goals that the client has. We do not sell products of any nature saying what the product is, because people don’t care. When you go in for surgery, you don’t care about the technical names of the instruments on the tray. You care about what the instrument does.”
Cloke said one way to approach the conversation is to say, “If I can build an income stream for you that you cannot destroy, and if you buy it in a way that you don’t lose the principal whether you or your spouse lives or dies, would you want that?” He said that describes installment cash refunds and period-certain options. “Those are all true things. Depending on the response of the client, that’s how I structure a particular contract.”
Inflation vs. Longevity
Inflation and longevity are two other aspects of the new normal that consumers don’t seem to have come to terms with, according to the LIMRA survey. LIMRA CEO Kerzner said the imbalance is becoming critical to consumers’ well-being.
“Inflation takes a much bigger slice of mind share in people’s planning than it should,” Kerzner said. “In fact, in several different studies, inflation came out No. 1 or No. 2 in top concerns on what could mess up a retirement.”
If inflation is at all a concern, it is certainly not expected in the next couple of years. And even then, there are few predictions calling for the wild days of hyperinflation to return in the next several years, if not decades.
The real threat of outliving money is disconcertingly low in the consumer surveys, by Kerzner’s reckoning.
“Only 27 percent of retirees consider longevity a top concern, and I think anybody that really knows the numbers puts it No. 1,” Kerzner said of the consumer sentiment survey.
Advisors know the risk. They placed it No. 1 in another LIMRA study. Companies are aware, too, and some are trying to ring the alarm bell.
Prudential launched an ad campaign that tried a few creative ways of conveying the risks. Some TV commercials featured behavioral expert and professor, Dan Gilbert. One in particular is called “Age Stickers,” designed to illustrate longevity.
People in the commercial were asked to think of the age of the oldest person they have ever known and place a colored, round sticker at that year on a wall depicting an age range beginning at 61. That was the average life expectancy when Social Security was enacted to start at age 65. When they were finished, the wall looked like a technicolor wave cresting in the 90s.
What the commercial did not feature was a speed-reading litany of disclaimers because it did not discuss products. That is up to agents and advisors.
Kerzner said the best way for advisors and companies to convey the message is to break it down in real income planning, echoing what Olsen and Cloke said.
“If you think about benefit statements, they’re showing how much a plan participant will receive each month,” Kerzner said. “Those will really help a lot because people might think $200,000 or $400,000 is a lot of money. But they don’t necessarily see what that’s going to generate in monthly income.”
That is the primary value that an agent or advisor serves for a client. “As more people work with advisors and see how much money they’re really going to have in the mailbox versus what they have in expenses, that’s going to help us get more people to annuitize.”
Despite the need for them, annuity sales overall have been slow to accelerate. But this year’s first half was promising for fixed annuities. One product line in particular has been strong since the crash – fixed index annuities (FIAs), which has galloped in most quarters since 2008, even as the rest of the industry sagged. FIA sales leapt 39 percent in the first half of this year, compared with the same period last year.
FIAs’ essential message of a minimum guarantee and upside potential resonates with consumers. As LIMRA’s survey showed, people are anxious about losing principal while the other eye is on the ever-climbing stock market.
Another strategy fitting into consumers’ concerns is laddering annuities, according to Drinkwater of LIMRA.
“You’re dollar-cost averaging,” Drinkwater said. “Your entire retirement income is not determined based on last week’s interest rate. Over time there are fluctuations, and you’re capturing that variability by multiple purchases.”
Drinkwater also pointed to deferred income annuities (DIAs), which are small in sales but growing at double-digit rates. That happens to also be a product that Cloke champions as a savior of retirements.
Cloke advocates them not only for the peace of mind that the guaranteed monthly income brings, but also for their unique tax treatment.
A common criticism of annuities is that they are LIFO – last in, first out when it comes to taxing. But DIAs are LIBO – last in, blend out, according to Cloke.
Cloke said deferred income annuities get pro-rational tax treatment, where 50 percent is taxable – which is why he calls it a “blend out.” Cloke said the distinction is significant for high-net-worth clients.
Advisors Key to Right Choices
The issues laid out in this article go beyond improving individual sales, although the data and experts point to strategy and thinking that can help convert prospects into clients. But in the larger sense, the insurance industry has been accused for some time of tending to only the highest-net-worth population for the big cases.
Annuities are built for individuals and families who have been able to accumulate respectable assets but are not rich. They worked hard for a rewarding retirement and are looking to secure that lifestyle.
The demographic group that is most interested in and can most benefit from annuities is the “mass affluent” with $500,000 to $1 million in investable assets, according to Kerzner. And as he and others explained, although people can be proud of amassing that nest egg, it might not yield the monthly income that they had expected.
In a previous study, LIMRA looked at people who would have retired in 1970 and lived to 1995. When the analysts ran different traditional investing strategies and models, the result was jarring.
“In all of the scenarios that we ran,” Kerzner said, “they ran out of money by 1993 under any set of circumstances.”
The question is, will people realize this in the last few years of their lives when it is too late to do anything, or will they realize this while sitting in an office across the desk from an advisor?
Drinkwater, who led that earlier research along with the more recent consumer sentiment study, said the keys to rescuing Americans from retirement disaster are to convey the risk of longevity first and then explain the security of annuity guarantees.
“One conclusion from this research is that it will lead to greater acceptance in the long run,” Drinkwater said. Along with consumers, agents and advisors have a New Normal to acknowledge. Clients, particularly baby boomers, are not fixated on leaving a legacy. They want peace of mind.
“Generally they’re sold on the concept of ‘This is part of my retirement that I do not have to worry about. I can enjoy myself and not worry about the money running out because it never will during my life,’” Drinkwater said of boomers. “The ideal retirement for them is they spend their last dollar on the last day they are alive.”