For your conservative to moderate clients, fixed indexed annuities (FIAs) may be a good fit, especially in today’s persistent low rate environment. Research indicates that FIAs may be suitable as a bond substitute, for greater diversification, to help de-risk portfolios and to mitigate longevity risk (Source: Roger Ibbotson, “Fixed Indexed Annuities: Consider the Alternative.” March 2018). FIAs can offer upside potential linked to the performance of an underlying index—and also guarantee principal protection, for risk-averse clients concerned about losing their initial investment or credited earnings when volatility is rising or when there is a sharp market downturn. Note that all guarantees are subject to the insurer’s claims-paying ability.
Taking On The Retirement Income Challenge
Just as tax-deferred and tax-free compounded growth are part of the foundation of accumulating for retirement, the 4% rule has been a cornerstone of retirement income planning for decades. But with ongoing volatility, interest rates hovering near 30-year lows, and the complexities caused by the pandemic, clients today face difficult choices. Many are forced to reduce withdrawals, take on riskier assets or increase the chance of depleting their portfolio and outliving their savings.
In fact, nearly three-fourths of investors (72%) said the pandemic has had a negative impact on how long they could live off their retirement savings. More than one quarter (26%) said it’s likely they would need to delay taking retirement income for the next 12 months and more than one-quarter (26%) also said they would need to reduce the amount of their retirement income withdrawals for the next 12 months.
Protecting Against Outliving Savings
According to Advisor Authority, nearly three-fourths of Millennial investors (72%) and nearly two-thirds of Gen X investors (65%), said they would feel more secure if a portion of their portfolio was invested in an annuity to help protect against outliving their retirement savings. When a predictable source of income is guaranteed by an annuity in one part of the portfolio, this not only helps protects against longevity risk, it also frees up assets in another part of the portfolio to invest for growth potential, inflation protection and to leave a greater legacy.
Recent analysis also suggests that allocations to variable annuities with Guaranteed Lifetime Withdrawal Benefits (GLWBs) can create more income with less risk than through systematic withdrawals alone, reducing the risk of portfolio depletion (Source: Goldman Sachs Asset Management, “Extending the Retirement Runway.” November 2020). In fact, according to Advisor Authority, 84% of advisors and financial professionals say that the use of an annuity with an income guarantee is important for supporting a sustainable withdrawal rate. Many of the advisors and financial professionals we work with have adopted a new approach to the 4% rule by using a VA with a GLWB to provide a guaranteed withdrawal rate for life, in some cases including up to 100% equity exposure for greater income growth potential and protection from market downturns.
Have A Plan—And Stick To It
Despite the current financial pressures, it’s important to help your clients understand that decisions made today can affect their financial future. As you guide your clients through the year ahead, and the recovery continues to unfold, there’s bound to be challenges. For the best chance of success, clients will need your help to develop a holistic financial plan. And many will need your help to stick to it.
Creating a plan and a well-diversified portfolio, structured to help protect assets against declining markets, ongoing volatility and record low interest rates, is crucial no matter the stage of their financial lifecycle—accumulation, retirement income or legacy planning. During these uncertain times, you can help clients keep their emotions in check and stay focused on their long-term goals. As Advisor Authority shows, 93% of investors say that having a financial plan helps them feel in control, even if they can’t plan for everything.
Craig Hawley is head of Nationwide’s Annuity Distribution.