DENVER, CO – Dec 28, 2015 – As many retirement-age Americans start to tap into the money they’ve been saving for decades, a retirement income strategy is catching on with people who want to keep working for the creative enjoyment of it while relying on a source of monthly income that can last a lifetime.
The strategy uses fixed index annuities, which do not directly participate in a given index. Rather, interest credited to the contract principal is based off of the performance of an index, such as the S&P 500, and that principal is protected from market losses. More U.S. consumers who are concerned about generating reliable interest credits in the current low-interest, volatile market climate are turning to fixed index annuities that pay out lifetime income.
Sales of fixed index annuities have surged 45.5% since 2011, growing to $48 billion in net cash inflows nationwide from $33 billion, financial research firm Cerulli Associates stated in its ninth annual “Annuities and Insurance” report, published this November. Variable annuity sales are almost triple those of fixed index annuities, but the gap has been narrowing in recent years.
According to financial advisor and insurance professional Colin Richards, president of Denver-based Lord and Richards, Inc., creative and active people who fully intend to work as they grow older are attracted to fixed index annuities because they provide an income stream backed by the financial strength and claims-paying ability of the issuing insurer, while freeing them up to focus on the work they truly enjoy.
He pointed to the range of professionals in his practice, from pre-retirement baby boomers with longtime careers to entrepreneurial millennials with small businesses, who have added fixed index annuities to their retirement income strategies because their monthly income functions similarly to a paycheck.
“I have a client who’s had a successful career as an accountant, and he is now in his early sixties. He wanted to remain active but stepped away from his full-time job because he was drained, burnt-out and ready for a change,” Richards said. “Now he’s officially retired and having fun – and actually earning even more as a consultant within his industry – and enjoying the financial independence that the fixed index annuity’s income stream gives him.”
Fixed index annuities (FIAs) are insurance products that provide interest credited to the contract’s principal either as determined by the insurance company selling the product or by the calculation of positive gains in a market index, according to the National Association for Fixed Annuities.
FIAs guarantee protection of principal and have no market risk because the owners of these annuities do not participate in the underlying markets upon which the annuity interest performance is based.
Insurance and finance professors David Babbel, of the Wharton School at the University of Pennsylvania, and Craig Merrill, of the Marriott School of Management at Brigham Young University, argue the case in favor of utilizing annuities as a part of one’s retirement income strategy in “Investing Your Lump Sum at Retirement,” published as a Wharton policy brief in 2007.
Investors who place their retirement assets in mutual funds, stocks, bonds or the money market are subject to greater market risk, Babbel and Merrill say.
“The economic models of rational behavior, which weigh the riskiness of outcomes against a person’s tolerance for risk, all show that equities are not substitutes for annuities, because they do not address the major risk we face of outliving our assets,” the authors write.
The public distrust of annuities is based on “common myths” that they cost too much and don’t address health-care or inflation issues, the professors assert. But, they write, the market for annuities has become competitive in recent years, with price markups coming down from around 6%-10% to less than half that level from top companies and approaching zero in some cases.
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