Is the Attack on Annuities Still Fair?

Like all insurance, annuities are designed to protect, not attack. They offer protection against financial downturns, sequence risk, and diminished spending power in retirement. Their intent is to take some of the uncertainty and risk out of retirement, so retirees can have the security of guaranteed income when their earning years are over. If anything, annuities attack risk, and ultimately, uncertainty.

Protecting Against What?

Annuities are not a single product. There are many, and each may address a single, or multiple risks. In this regard, they are not a “one size fits all” solution. 

During the “fragile decade” — the five years before retirement and the first five in it — retirees are especially vulnerable to sequence of returns risk. The dual forces of drawing down assets and decreasing asset values in a down market can increase the likelihood of an individual investor being forced to choose between living a more meager retirement or running out of money.

Annuities of different stripes were designed to bridge this fragile decade, by either insuring against losses explicitly, or insuring a guaranteed level of income regardless of market performance. Creating a durable, reliable income stream by insuring a portion of their portfolio may allow retirees to withdraw less from their other retirement savings, and even leave more of their portfolio invested in the market than they would otherwise feel comfortable with.

A new kind of annuity, a contingent deferred annuity (“CDA”), unbundles the insurance protections from the underlying investments to allow advisors to build lifetime income streams for clients by covering retail mutual funds and ETFs in traditional IRAs, Roth IRAs or taxable brokerage accounts.

This allows the risk to be “wrapped” without the footprint of a traditional income annuity or variable annuity, and the coverage may be dropped once an individual investor successfully navigates the fragile decade.

So, What Is the ‘Curse’?

This “curse” that apparently plagues annuities is more about perception than anything else. Many financial advisors focus on return on investment and maximizing ROI for their clients. From that perspective, annuities may not measure up.

But there’s that trap again: Annuities aren’t investments. They’re insurance. And a better way to think about them may be in terms of protecting ROI rather than improving it. 

The point of saving for retirement is to be able to spend in retirement. And while saving a large nest egg is certainly part of achieving that goal, tools such as annuities can create guaranteed streams of income such that retirees don’t have to worry about withdrawing money from their retirement accounts to meet their basic needs. Retirees can be free to think about what they want to spend their money on.

It’s certainly true that there are still advisors who hate annuities on principle, but they’re increasingly in the minority.

It’s also likely that clients want annuities more than advisors realize. A recent study by the Alliance for Lifetime Income and CANNEX found that 85% of investors were interested in owning an annuity, and of those investors, 49% were extremely interested. By contrast, only 18% of financial professionals believed their clients wanted annuities with lifetime income.

That disconnect is striking. As Tamiko Toland, director of retirement markets at CANNEX, puts it: “For financial professionals who aren’t at least considering annuities, it’s fair to say that they may not be listening to what their clients and prospects are looking for and are missing a significant opportunity to do what’s best for them.”

David Stone is founder and CEO of RetireOne, an independent platform for fee-based insurance solutions, including the Constance CDA.