Over the years, I've had countless conversations with advisers about retirement planning and the use of guaranteed income products. While some embrace annuities and their ability to offer consistency in retirement income, others are more dismissive.
It's not hard to see why these advisers are skeptical, especially if their experience with annuities is limited to commission-based, variable annuities. These products may seem complicated, expensive and hard to use in the fiduciary era. But these aren't the only type of annuities advisers should have at their disposal, and one size definitely does not fit all.
Here are four common challenges advisers face when using annuities for retirement planning, and some practical tips for overcoming these challenges.
Challenge #1. The world of annuities is confusing. Over the years, insurers have added features (and complexities) to annuity products to stay competitive, launching a variety of products offering principal protection, market participation, death benefits, income benefits and long-term care benefits, as well as various payment schedules and investment options. Some of these features could entail additional fees.
In addition, the process for a financial adviser to become insurance-licensed and maintain that, the operational complexity of submitting an application for an annuity and the added work to go through the compliance approval process can push many advisers away from these retirement planning options.
How to overcome it: While advisers will not use annuities for every client, they should know what types of annuities are available, how they work and how they may fit into a holistic financial plan.
• Fixed annuities provide a simple, tax-effective way to protect retirement savings, reliability and predictability.
• Variable annuities may provide valuable investment growth, which could be suitable for younger clients planning for retirement who may have a longer time horizon.
• Fixed index annuities provide clients with downside protection as well as growth potential.
• All the above annuities may be available with guaranteed lifetime income options for retirees, however such options could include additional fees.
Advisers looking for more information on annuities can look to the Insured Retirement Institute site for helpful content; or for company- or product-specific training, advisers can sign on to the RegEd site through their individual firms if available.
Challenge #2. Balancing guaranteed income and financial freedom. A recent Gallup poll found four in five non-retired U.S. investors (85%) believe it's important to have a guaranteed income stream in retirement to supplement Social Security. But at the same time, 50% want the freedom to spend their retirement savings however they choose. As advisers see fewer and fewer clients with traditional pension plans, the need for income is clear, but it can be hard to reconcile this need with the desire to spend freely in retirement.
How to overcome it: Retirees should never have to choose between lifetime income and financial freedom. One way to balance these needs is to identify different sources of income to meet different needs; for instance, retirement savers can use guaranteed income sources for essential expenses (like housing, utilities and healthcare) and use other assets, like stocks and bonds, for discretionary or recreational activities.
Challenge #3. Building portfolios that will withstand market fluctuations. One of the biggest challenges advisers face is finding fixed-income investments that offer guarantees and protection from market volatility. In the past, advisers may have felt confident using bonds and dividend stocks to meet income needs. But bonds don't offer the type of yields they used to, and in raising rate environments they can lose value. And dividend stocks can be viewed as overvalued and are subject to market risk.
Retirement savers worry about market volatility hitting at the wrong time. Global Atlantic conducted a survey of 1,005 U.S. investors ages 40 and older and found 74% are concerned about a stock market correction. As most advisers are well-aware, the closer an investor gets to retirement, the harder it becomes to withstand market dips and recover lost assets.
How to overcome it: Fixed index annuities offer an interesting compromise for risk-averse investors who are still looking to accumulate wealth. The growth of these annuities is benchmarked to a chosen stock market index, like the S&P 500 (although investors are not actually invested in the market), providing the feeling of market participation without the risk of market-based losses.
Challenge #4. Recommending the appropriate products in the fiduciary era. Following the first phase of implementation of the Labor Department's fiduciary rule, there was a perception that products that offered a commission, rather than fee-based based compensation, would no longer be available.
How to overcome it: Regardless of the final outcome of the DOL fiduciary rule, most firms and their advisers have moved to an environment of conflict-free compensations structures, both fee- and commission-based. The added focus on disclosure and transparency helps advisers and clients choose the best option to meet their individual needs. The positive side of the regulatory change is that firms and insurance companies are investing in technology to educate both advisers and their clients, as well as to make these important retirement planning options available in a more accessible and cost-efficient structure.
Paula Nelson is the president of Global Atlantic Financial Group's retirement practice.