Headley By Terry K. Headley, LUTCF, LIC, FSS
NAIFA Immediate Past President
A number of clients I’ve talked to over the past two months are understandably nervous about the extreme volatility in the markets. The anxiety is particularly high among older people approaching retirement. Many lack the risk tolerance to ride out a rough patch with their investments, much less to speculate on market volatility. They’re having flashbacks to 2008 and early 2000, worrying about having to postpone retirement parties or lower their standards of living. Some who have watched their stock portfolios drop by tens of thousands of dollars in a single day said they are fearful of outliving their savings.
I sense a strong yearning for stability on Main Street and a desire to protect retirement nest eggs, and this has even filtered down to younger investors, who plan on working for many more years or decades. It started before the U.S. debt-ceiling standoff, European debt crisis and other recent shaky economic news, but I suspect the market turmoil will only further a trend I’ve noticed over the past few years: more and more clients are asking about various annuity solutions.
For a long time, these financial products were in need of some good PR. They certainly had to be sold, and people who could have benefited greatly weren’t always buying. University of Chicago professor Richard H. Thayler and other economists have dubbed this the “annuity puzzle.” Thayler explains that, by and large, people who purchase annuities receive more annual income for the rest of their lives than those who self-manage their retirement portfolios. A June 2011 report by the Government Accountability Office agrees. The GAO concluded that consumers’ reluctance to buy annuities has proved costly for many people throughout their golden years.
The 2008 market collapse changed some attitudes. While many clients heavily invested in equities found themselves reducing expenses or extending their time in the workforce longer than they had planned, those with annuities remained on track, benefiting from the predictable, guaranteed stream of income these products provide.
Others took notice. More than 80 percent of my colleagues at the National Association of Insurance and Financial Advisors said in a recent survey that clients nearing retirement age are more interested in risk-protection products that safeguard their principal investment and provide a “paycheck for life” than they were prior to the recession. Nearly 60 percent of the advisors said this trend also extends to younger people.
However, I still find that too many clients are looking at annuities from the wrong angle. They worry that if they die sooner than expected an annuity might not be worth their while—even though beneficiaries can continue to receive the annuity income payouts. Really, they should be looking at annuities for what they are—insurance against outliving their retirement savings. By mitigating the longevity risk, annuities provide peace of mind no matter how volatile the markets get on Wall Street.
And many of my clients with annuities will tell you that they’re able to enjoy better peace of mind in their retirement years, without having to ride the emotional roller coaster of the markets.