There was a time, not so long ago, when many Americans felt comfortable planning for a 15- or 20-year retirement. Of course, they had pensions, they felt good about the viability of Social Security, and interest rates were robust.
Today, pensions have all but disappeared, Social Security is on near life support, and interest rates continue to hover near historic lows, making retirement income planning even more challenging.
And baby boomers are feeling the brunt of it. “So you have a large group of individuals that are moving into retirement that are less protected than the previous generation and are expected to live longer than any other generations,” says Scott Stolz, head of insurance solutions at SIMON Annuities and Insurance Services LLC in St. Petersburg, Fla. He notes that this wave of new retirees is the first group of individuals who do not have pensions en masse.
Stolz, who previously served as president of the insurance and annuity division of Raymond James, also points out that boomers have gone through a few notable financial lows, beginning with the dot-com bubble from 2000 to 2002, which Stolz notes was not that big a deal because they were still young. But then there was the financial crisis, between 2007 and 2009, which scared many people. And as boomers were nearing retirement, they had to deal with the 30% drop in the market in March 2020 during the pandemic (thought it has since recovered).
“But they are now at a point in their work life that they cannot go backwards,” Stolz says. By that he means looking at risk the way they did when they were younger: People don’t get as much benefit from getting another 15% to 20% on their retirement portfolios at this point—they’re more afraid of losing 15% to 20%. “You have got this entire generation who is now looking to protect what they built.”
And if recent sales are any indication, many people are turning to annuities for that protection. After the products faced several tough months last year because of the pandemic, annuity sales rebounded in the second quarter of this year to a record $68.2 billion, a 40% increase from last year, according to the Secure Retirement Institute’s U.S. individual annuity sales survey. Third-quarter total sales fell off a bit but remained strong, at $62.2 billion, up 12% from the third quarter of 2020. Year to date, annuity sales have increased 19% to $191.4 billion, the highest figure for the first nine months of the year since 2008, SRI said.
Todd Giesing, vice president of SRI Annuity Research, says there are a few noteworthy factors in the recent sales trend. “When you look at the sales of products, we are seeing a significant amount of the growth in 2021 coming from what we call protection-based products,” he says, explaining that these products include registered index-linked annuities, fixed-rate deferred annuities and other products like index annuities that do not have a guaranteed living benefit.
He says the sales also reflect pent-up demand. Last year, he notes, people’s priorities were on family, not financial and retirement planning. “We are starting to see people get back to a sense of normalcy and put more of the focus back on the steps that they normally would have taken for retirement planning.”
But retirement planning has become a problem, says David Lau, CEO and founder of DPL Financial Partners. Safe forms of funding retirement have basically gone away, he says, so people will be looking to self-fund their retirement for a third of their lifetime in a low-interest-rate environment. “And if you are looking at investing in a 10-year Treasury, you are only going to get 150 basis points at this time, and that’s not going to fund much retirement, sadly,” he says.
Lau says his firm is seeing portfolios with heavier equity balances, at 70% or even 80%, because the 14-year bull market has spurred equity accounts to grow and because people have shied away from the low yields in fixed income. Those low yields have also prompted people to move from bonds to alternatives. “So clients are getting more risks in their portfolio on both sides and that’s a real problem,” he says. “Should the bull market stop running, as they say, I think it’s going to be bad for a lot of retirement portfolios.”