Throw caution to the wind? Not young boomers

Study finds people happier with lower return and guarantee than higher return only

Apr 11, 2013 @ 9:50 am

By Darla Mercado

Despite recent market gains, younger boomers are willing to settle for lower returns, provided they can buffer themselves from the downside.

That was the conclusion Allianz Life Insurance Co. of North America reached after surveying 1,425 individuals between 55 and 65.

In all, 87% of the participants said they found a product with a 4% return and a guarantee that it won't lose value to be more attractive than a product that provided an 8% return plus exposure to market downside. The guaranteed option was also overwhelmingly favored by women, as 91% of them preferred the 4% guarantee compared with 82% of men.

Participants also pointed to “increasing my savings rate” as the top financial objective before retirement, followed closely by “a withdrawal strategy that ensures I won't outlive my income” and “an investment strategy to grow my assets.”

The reluctance of even the youngest participants to get into the market stood in stark contrast with the fact that the stock market continues to experience massive gains. The S&P 500 Wednesday hit a new intraday trading high of 1,587.80, climbing through its all-time high of 1,576.09, which was set on Oct. 11, 2007.

“We thought there would be a restoration of confidence,” Walter White, chief executive of Allianz Life Insurance, said in an interview. “Retail investors missed the run-up in the markets, and now people want something more secure.”

He noted that at 55, people still have a way to go before they reach retirement, they “should start thinking of where they're getting their income” in retirement.

While participants found the attributes of annuities to be appealing — 60% acknowledged that annuities can provide the “possibility of guaranteed income for life” — only a quarter of the respondents said they owned an annuity.

Indeed, the industry is at a turning point as carriers grapple with interest rate and market volatility exposure through their variable annuity blocks and the impact of long-term low interest rates on fixed annuities. Indexed and income annuity sales hit record levels last year, according to Beacon Research Publications Inc. Indexed annuities climbed by 3.7% year-over-year, hitting $34.2 billion in 2012. Meanwhile, income annuity sales jumped 8.5% to $9.2 billion.

The year was unkind to variable annuities, however, as net flows in 2012 dipped to a 10-year-low of $14.7 billion, down from $27.7 billion in 2011, according to Morningstar Inc.

The next evolution for manufacturers seems to be creating variable annuities that combine structured products and offer a combination of limited downside protection in exchange for a cap on returns.

“From the company's standpoint, it takes the risk of the conventional variable annuity off the table,” Mr. White said. “Carriers want less volatility and exposure to swings in their books. There's more of a push to [this product design].”

Such a product already is on the drawing board at Allianz, due for a possible release in the fall. Axa Equitable Life Insurance Co. was the first to come out with the hybrid structured product/variable annuity — its Structured Capital Strategies product.

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