Retirees are increasingly worried that they will live too long and their savings will run out, and financial services companies are noticing.
AXA Equitable Life Insurance Co. is the latest vendor to offer a financial product aimed at retirees who want to know that their money will last at least as long as they do.
The New York-based firm's Crossings: My Lifetime IRA allows individuals to transfer funds from 401(k) plans and other employer-sponsored retirement plans to a variable deferred annuity.
AXA Equitable offers guaranteed income of 5% a year through the life of the retiree, even if the investment drops in value. The firm will pay out more than 5% of the initial investment if the value of the income base grows through investment performance, said Bill McDermott, executive vice president of AXA Equitable's corporate-markets group.
AXA Equitable joins many other financial services companies, including New York-based
MetLife Inc. and
Prudential Financial Inc. of Newark, N.J., in introducing products for retirees who are willing to pay fees and endure investment limitations for the security of a guaranteed payout.
"This is great for someone who wants to participate in the equities market but can't afford for the markets to go down," Mr. McDermott said.
Employee assets in 401(k) plans, defined contribution plans and lump-sum defined benefit plans could fund the annuity, according to the company. Traditional retirement plans don't offer this type of guarantee, Mr. McDermott said.
Employers, especially larger companies, are beginning to look for a guaranteed-income option, he said.
"Everyone in the variable annuity space is trying to figure out the best way to get into this," Mr. McDermott said. AXA Equitable's product is aimed at companies with 10,000 employees or more "because larger companies seem to be the first to do innovative things like this," he said.
There are five portfolio choices for retirees in this annuity, ranging in the aggressiveness of the investments.
Most participants would do well to choose aggressive options, given the guarantee, unless the retiree thinks that he or she may need to take the money out, Mr. McDermott said. If so, market volatility would be a concern, he added.
As with all annuities, there are fees. There are surrender charges for withdrawals during the first three years, as well as an annual fee — which increases if the annuity is to cover the life span of a husband and wife — and fees for managing the underlying investments, according to AXA Equitable.
Since many people say they are going to roll their retirement savings into an individual retirement ac-count anyway, this "is like an insured IRA," Mr. McDermott said.
Insurance may sound attractive to retirees right now as economic anxiety is rising among America's seniors, according to the AARP, the Washington-based lobbying organization that represents 37 million people aged 50 and older.
"There's always a fear among retirees that they'll outlive their savings," said David Certner, legislative policy director for the AARP. Now, though, the volatility in the stock market, declining home values and the near-historic lows in the bond market are making matters "particularly tricky" for seniors who don't have much financial flexibility, he said.
Many people are looking for some type of guarantee for retirement. However, they don't want to lose the value of that investment for their heirs if they die on the younger side, Mr. Certner said.
Financial advisers, who tend decry annuities, said they don't think that even today's economic fears should push retirees into these products.
The only time an annuity with a guarantee is appropriate would be if the person's biggest concern were to ensure a guaranteed income stream, said Bill Thonn, an adviser with Oak Brook, Ill.-based Whitnell & Co., which manages about $750 million in client assets. Of course, if they know that they are going to be around for 50 more years, "then actuarially, you'd be way ahead," he said.
Mr. Thonn recommends a solid investment strategy implemented over time that is refreshed as the market changes and as the aspirations of the retiree changes. That is a better approach to address the unknown needs of clients than a product "sold on the basis that no matter what your problem or concern, this is the answer," he said.
Usually, an adviser can earn a client about 8% a year, Mr. Thonn said. So with a guarantee of 5%, someone is leaving about 3% on the table in exchange for that promise, he said.
"Annuities make sense for the insurance person who is selling it, because they get a huge commission check for selling it," Mr. Thonn said. "But the cost of that guarantee has to be embedded somewhere in the product."
