Fear, Retirement and Annuities

Man and woman escape the panic fear retro style pop art

Quick, what’s the nation’s #1 fear? Many would answer death (nope, it’s #6), some even spiders (#9). Many get it right – fear of flying, which not only encompasses fear of heights (#3) but claustrophobia as well (which, surprisingly, doesn’t rank in the top ten). Dale Carnegie built an industry on #2, fear of public speaking. And he realized early on that what he had developed was much less about speaking than it was boosting self-confidence.

But ask the question in the context of people’s finances, and a few other fears bubble to the top.

In its 16th and latest annual study about retirement, A Compendium of Findings About American Workers, Transamerica Center for Retirement Studies® finds that the #1 fear of full- and part-time workers of any age is outliving their retirement savings (51% of all respondents), followed closely by the fear that Social Security will be reduced or disappear (47%), which of course is a subset of Fear #1. Only 15% of respondents are very confident that they’ll be able to retire comfortably, and those participating in defined benefit plans has shrunk to 26%. Correlation?

While hardly a panacea to these fears, one cog in the retirement wheel for many prospective retirees is annuities. That’s because, it’s the only personal property they can own that can guarantee an income they can’t outlive. So we thought we’d take a quick look at what’s up with annuities, and here’s what we found:

According to LIMRA, sales of fixed-income annuities (FIAs) grew to a record level of $117 billion in 2016 – the ninth record year – for these reasons:

1.A large block of fixed-rate deferred annuities was in motion in the early part of the year from 2009, a time that reflected a flight to safety from variable annuities and other variable investment options.

2.Many people continue to favor the protection of principal as one way to undergird their retirement nest egg.

3.Some FIAs come with the option of guaranteed lifetime withdrawal benefits (GLWBs) at rates that appear attractive in an environment of persistently low interest rates.

Variable annuities (VAs), on the other hand, recorded their fifth straight year of decline and are at their lowest levels since 1998. VAs peaked in 2007 thanks to a raging bull market and, in their efforts to stay competitive, the addition of highly generous GLWBs, some as high as 9%. GLWBs on VAs have since come down to earth – at best half that level now – or are not offered at all. The result has been a reduction in volume of GLWB-based VAs of more than 50% from just five years earlier.

Under the DOL ruling, VAs and fixed-indexed annuities (those that pay the greater of a fixed or indexed return) will be subject to the best interest contract exemption (BICE). (Annuities are, after all, inextricably bound to retirement planning.) The expected cost of compliance will likely lead to higher costs for annuities, which may only exacerbate the perception on the part of many that they’re expensive to begin with. (FIAs will not be affected by the DOL ruling.)

Like any insurance contract, which it is, an annuity comes with, well, a premium. The owner pays an added fee for being able to soften the fear of being left high and dry in her or his dotage. So like the other cogs in the retirement wheel, all its elements need to be understood, and explained, in the broader context of wealth management and retirement planning.