Deferred-income annuities are all the rage among advisers and their boomer clients, but will the phenomenon trickle down to younger investors?
New York Life Insurance Co. hopes so. The company today said it would reduce the initial required deposit for its popular Guaranteed Future Income annuity to $5,000, from $10,000. The drop in the initial premium would give the insurer a broader market to tap, namely those who otherwise would fund their individual retirement accounts with that money. This year, individuals can contribute up to $5,500 into an IRA.
So far, New York Life has sold more than $1 billion in deferred-income annuities since its July 2011 launch. Many of those buyers are in their 50s, rolling out of retirement plans and trying to create a personal pension, noted Matt Grove, a senior managing director at New York Life. But he believes savers in their 20s, 30s and 40s might find the product appealing.
“There is no doubt that a significant amount of the money is coming from rollovers,” he said. “But we see younger people setting up recurring payments into the annuity, asking for a certain amount of money to be withdrawn from their bank account on a periodic basis.”
Indeed, younger clients are only required to seed the annuity with $5,000. Subsequent contributions can be larger or smaller.
With decades to go before retirement and the assumption that interest rates will change, buyers in their 20s, 30s and 40s have the benefit of making incremental purchases over time. Carriers also benefit from funding their longer-dated liability with long-dated, higher-yielding assets.
“This is a way to take responsibility for your own personal retirement,” Mr. Grove said.
Though advisers are aware of the value deferred-income annuities can bring to clients in their 50s, they are a little more reluctant to recommend that younger clients begin funding such a purchase.
“Most younger people can take the [market] risk,” said Carrie Streets, a senior financial consultant at Crest Financial Strategies. “The 45-to-55 market tends to have more in balances and less tolerance for volatility.”
Priorities are different for those in their 20s and 30s, noted R. Alan Moore, founder of Serenity Financial Consulting. “At that age it's about savings habits, setting aside money for retirement and letting it work for you,” he said.
While it may make sense for clients who are close to retirement to think about tax-efficient withdrawal strategies and having money in accounts with different tax treatments, young clients can hold off on those tactics for a number of years.
Ms. Streets agreed, noting that young clients' financial plans change over time, so there is the risk of committing to a tax diversification strategy too soon. “If you're targeting 30-somethings, you're talking about 30-plus years of commitment to the strategy,” she said. “Many people change their plans and their advisers.”
For younger people, “most aren't looking for big tax-deferred savings; they want to pay down debt and student loans,” Mr. Moore added.
Nevertheless, Mr. Grove said that that for those who already are chipping in to their IRA, a move to fund the annuity shouldn't be too jarring.
“Younger folks have expenses and student loans to worry about, but we're not arguing that they should fund beyond what they're doing already,” he said. “If you're making IRA contributions now, why not direct the funds toward something that creates a guaranteed stream of lifetime income?”