Boomers may turn to annuities for retirement income.

Part 2 of 2

Many financial advisors along with financial services firms are reconsidering the use of immediate variable annuities or immediate fixed annuities as part of the retirement paycheck solution.

The problem, as we discussed in part 1, is this: Millions of baby boomers are nearing their golden years, but they have limited knowledge and few authorities to consult about creating an income stream that will last throughout retirement.

Annuities, viewed as second-class products for middle-brow investors, are suddenly seen as part of the answer. "It's the core of an ongoing academic debate: whether you want insurance for living without income," says Dallas L. Salisbury, president and CEO of Employee Benefit Research Institute in Washington, D.C.

Indeed, economist John Ameriks at the TIAA-CREF Institute, the research and education arm of New York-based TIAA-CREF, has produced research that shows it's more likely retirees will enjoy higher incomes over longer retirements if they annuitize 25% to 50% of their assets.

According to Ameriks and others, retirees face inflation, market, savings shortfall, medical, and longevity or mortality (the possibility of outliving income) risks. "People don't have a good handle on mortality risk," says Ameriks. "Insurers can pool the risk and use assets from those who don't make it to fund payouts to those who do. No fund or advisor can do that."

Michael C. Henkel, president of Ibbotson Associates, a Chicago-based asset allocation service provider, concurs. He notes most market risk can be managed with asset allocation, longevity risk can be managed with annuities, and inadequate savings can be managed with an increase in savings. He also says advisors and their clients have the additional responsibility of sorting through not just post-retirement risks but also post-retirement goals, including lifestyle and bequests.

Baby boomers have a reputation for wanting it all, Henkel says. Advisors must be prepared to help clients find the right balance between assets and annuity products to meet income and bequest goals and to address market and longevity risks, he adds.

"Boomers don't want to underconsume, and they want to know where their next paycheck is coming from," says Henkel. He notes many large institutions are now standardizing the inputs required to create post-retirement optimization outcomes using annuities and asset classes for their clients. Those inputs, he says, are risks and returns, risk tolerance, desires for consumption and bequests, the investor's assessment of the probability of living beyond life expectancy, and expenses and fees.

According to Diversified Services Group Inc. (DSG) in Wayne, Pa., it's also important for advisors and clients to address health care funding and housing when creating a retirement income strategy. Kurt Cerulli, the founder and principal of Cerulli Associates, remarked in a speech at the Investment Company Institute's meeting in May that converting personal financial wealth to income is a function of three assets: financial wealth (IRAs and brokerage assets), which produces supplemental income; retirement wealth (pensions and Social Security), which produce secured income; and nonfinancial wealth (housing wealth and other assets), which can provide equity income. (See inputs below.)

Fidelity Investments Institutional Services Co. says advisors can take these key steps to help clients with retirement income: