By Bill Broich
1. Outsmarting Longevity Risk: Income Rider. Income riders changed the deal. No longer accurate is the perception that insurance companies are offering income so when the annuitant dies, they keep the money. For years, this has been the myth. The creation of fixed indexed annuities with income riders (guaranteed lifetime benefits) means retirees can enjoy lifetime income, protect against living too long and still have control of their money if they choose.
2. Banks Yields Are Low and Will Remain Low. It is a political guarantee based on one simple concept: the government must keep interest rates low to avoid an even higher deficit. Many depositors sit and wait for the good old days, days with bank CD rates were at 8% or higher. Dodd-Frank came along and insisted that bank reserves be higher and banks found the golden egg… fees. Banks just don’t really care that much, the FED is providing the money and fees supplying the net income. Look at the current sales of fixed annuities sourced in banks, the advantage annuities have over Bank CDs is currently 88 basis points.
3. Government and the Congress. Jack Marion’s article said it best. (Marion quote) “Treasury proposed new rules making annuities easier to offer in defined contribution plans. This year the Secure Annuities for Employee (SAFE) Retirement Act of 2013 was introduced in Congress and the proposed bill is favorable to annuities. Even anti-annuity publications such as Kiplinger and Money have said that at least a few fixed annuities might be better than a poke in the eye. Due to the reality of annuity guarantees (and the reality of two severe bear markets within a decade) the annuiphobes (good word isn’t it….BB) have been forced to admit that maybe a retirement income that isn’t completely based on the whims of the market might be a good thing and they are, reluctantly, telling the public that annuities are not evil.”
Dr. Marion is correct, the media forces such as security based blogs are fighting annuities and probably will continue. They won’t win for one simple reason, once the baby boomers discover our products and their guarantees, they will buy annuities. Just look at FIA sales this past quarter, huge increases and it is only the beginning.
4. Bonds will be the downfall. The only possible way a bond can compete with a fixed income annuity (with an income rider) is to offer lower rated bonds for a higher rated yield. Combine that with the value of bonds shifting in the wind and only the very inexperienced and trusting baby boomer would buy. Bonds can lose money.
Jack Marion quote: “It will come as a surprise to many to discover that the safer-than-safer U.S. Treasury debt based exchange-traded fund or mutual fund they own can produce principal losses.”
Ever wonder how these could lose money? Simple: the answer is fees.
5. The Outsourcing Syndrome. I go to work, I come home, I see the family, I go to bed, I repeat it daily. All this is part of our living routine. At work I receive instruction from my boss, he is outsourcing to me, I outsource my children’s education to a school, etc. I use that same outsourcing concept in almost everything I do. I use other people’s services, doctor, dry cleaner, and gardener, outsource, outsource, outsource. Since the mid 1800’s we have evolved into a nation of outsourcers. The same will be true when time comes for retirement – we will outsource the responsibility. It could be to a financial planner or broker but as safety and security become more paramount, it will likely evolve to a risk manager i.e., an insurance company. More than likely the insurance company will use an annuity product as the vehicle for retirement income.
We haven’t seen anything in the past like what is on the verge of happening with the annuity industry. The time will come when annuities will provide the very basis of most financial plans.
Why? The answer is simple, safety, security and freedom from risk.
For more information about Dr. Jack Marion: http://www.indexannuity.org/
