Advisers hoping to broach the topic of annuities with clients ought to step back from product features and focus on the greater context of longevity protection.
That was the message of Gary Bhojwani, chief executive of Allianz Life Insurance Co. of North America, this morning's keynote speaker at the Insured Retirement Institute's annual conference in Boston. His presentation looked at the history of retirement savings and the new challenges awaiting baby boomers as they leave the work force and prepare to take income.
“The real risk isn't whether my roll-up is 4.5% and yours is 5% — that's not what these products are about,” Mr. Bhojwani said. “It's less about the individual features, but we have better traction by helping people understand the need at a macro level.” That means confronting the realities of longer lives and other changing demographics.
Advisers ought to understand that a male client who's 65 today stands a 50% chance of making it to his 82nd birthday, while a female client who's 65 has a 1 in 4 chance of living to 92, Mr. Bhojwani said. As a result, those clients are living long enough to watch inflation erode their purchasing power and drive up costs — and some of those expenses, like the cost of health insurance, aren't likely to fall any time soon, he added.
Other demographics also are hurting retirees' income prospects. For instance, there are fewer workers to support each person using entitlement programs, Mr. Bhojwani said.
He noted that in 1950, there were 16.5 people working for every one person receiving benefits from
Social Security and entitlement programs. That ratio is scheduled to drop to 2.3 workers for every one person receiving benefits in 2025. “It doesn't matter what system it is or whether it's Republican or Democratic — this system has to change: The eligibility age must go up and the benefits must come down,” Mr. Bhojwani said.
Other risks he cited included sequence-of-return risk, which can ultimately reduce the length of time an income stream will last if large market losses occur early in the withdrawal phase.
Though the convergence of all those risks would seemingly make annuities attractive to consumers, most clients tend to disengage when even hearing the word “annuity.” However, if advisers and manufacturers make customers aware of the larger risks at hand, they may be more receptive.
“What the distribution and manufacturers need to do is to get out and explain what's happening in America relative to retirement income planning — not even as a sales pitch, but to say, ‘Here's what's going on,'” Mr. Bhojwani said.
“Perceptions are based on dated products and features, but the real opportunity is what's happening in demographics,” he added.
