If you're in the annuity industry, a client has probably walked into your office with preconceived notions about annuities for retirement planning, partly due to some critics' opinions on annuities that may not consider the needs of everyone. Critics believe variable annuities aren't right for anybody, and they convince people lifetime income retirement strategies are available elsewhere. For many people, that's not true.
Millions of Americans are approaching retirement with inadequate savings and income. Additionally, many Americans lack a sound understanding of anticipated longevity and practice poor spending habits due to insufficient financial knowledge.
While medicine has experienced great advancements that will allow many to live into their 90s and beyond, the strain on household finances will continue to grow. More people should focus on not running out of money during retirement.
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Alarmingly, nearly half of workers said they and their spouse had less than $25,000 saved for retirement, per a report from the Employee Benefit Research Institute. Not surprising, given rising tax rates and the financial strain many American families face. On top of that, the U.S. is too dependent on Social Security. The average payment is about $16,000 a year, which is officially poverty level for a household of two.
To solve this national crisis, we need to provide investors with clear, useful information. Otherwise, it could mean poverty and destitution in retirement for many who don't know their options.
Consumer perceptions of annuities are worryingly inaccurate. As an industry, we can't sit by and let the opinions of a few overshadow how variable annuities can play a critical component of today's retirement planning.
Here are some core truths about annuities that are commonly misunderstood:
1. Critics say annuity contracts are obtuse and confusing, misleading buyers. While the industry could do a better job of eliminating jargon — much of which is regulated by legal entities — most annuity purchasers are satisfied. In fact, a LIMRA consumer investment study found that 75% of variable annuity buyers, 83% of indexed annuity buyers and 86% of traditional fixed annuity buyers are satisfied with their deferred annuity purchase.
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2. Another common annuity misnomer is that sales reps lie and peddle for commissions. However, commissions have long been the norm in the insurance industry because most of the adviser's work happens upfront in the sales process. Annuities are intended as long-term vehicles. Since some buyers require less ongoing advice, commission-based arrangements are sometimes the most cost-effective option.
That said, many annuities are now available in either fee- or commission-based versions, because allowing consumers to choose the payment structure is important. Both types of annuities can co-exist, and the client's individual circumstances, such as how active or passive they are with their investments, can make a long-term difference in choosing the best option.
3. Interestingly, some critics say annuities have "high" fees, but in the same breath, they are "too good to be true." I believe more advisers should consider a component of lifetime income as part of their clients' retirement plans, and annuities are the only source of guaranteed income for life if this feature is opted in the contract. Despite market fluctuations that can impact underlying investments and principal amount, a guaranteed future income amount would still be available so people don't outlive their money.
It makes sense that a product with a higher-quality feature has costs associated that aren't the same as a product without this feature. Other optional benefits are available for additional fees on annuity contracts, and each comes with its own advantages, charges and potential restrictions. As with any higher-priced product, a buyer pays for the product's features and design, which fills a need other investments can't. Furthermore, the claims-paying ability of the issuing insurance company backs the guarantees.
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People don't need to be financial experts to understand the importance of annuities in retirement, but they should consult with a financial expert to fully understand the contract and determine if one is right for their situation. Along with protection and growth, a variable annuity can provide a consistent, guaranteed stream of income throughout the life of the contract holder. Without a lifetime income component, many people will struggle during retirement.
Greg Cicotte is the executive vice president and chief distribution officer of Jackson.
