With the choppy economy and annuity critics seemingly popping out of the woodwork, what motivates boomers buy annuities?
After all, there are plenty of choices—bank certificates of deposit, stocks, bonds, mutual funds, managed accounts and more.
The motivator is the product that best meets the boomer’s need, particularly where retirement income is concerned, say industry sources.
Annuities have had bad press in years past, allows Greg Reynholds, vice president-asset management for Lenox Advisors, Inc., a New York firm specializing in the high net worth market.
But the guarantee features added to annuities in recent years—such as guaranteed income riders—have created incentives for boomers to look at annuities for a portion of their portfolio, he says. They use the products to meet retirement income needs, he says.
His firm does a lot of client education around the financial and retirement plan and about the various products that can be used to meet plan objectives, Reynholds points out. The recommended allocation is generally for 5%-10% to go into annuities, primarily variable annuities with guaranteed living benefits.
That’s assuming the annuity fits the client’s overall strategy, he stresses.
“We don’t want clients to be in a situation where, when they retire, they find 50% of their net worth has been erased,” due to a market drop, for example. A VA’s guaranteed floor on income payouts addresses that concern, he notes.
The guarantees open up another motivator for boomers, he indicates. “Boomers can invest more aggressively, because they know their income is guaranteed.”
People do tend to become more conservative as they age, Reynholds allows. “But if you’re going to live 30 or 40 years in retirement, you can’t be so conservative.”
Boomers could opt for other conservative choices, like Treasury bills, CDs and bonds, he says. “But then you run the risk of not outpacing inflation, or even keeping up with inflation.” He says his firm educates on these points, and boomers do agree with the recommendations.
“Some boomers don’t want to put money into any investment, when the market is down,” points out Laura Harris, principal of Laura Harris Agency, Inc., Corpus Christi, Texas. And, as they grow older, they become more risk averse, she says.
So she too takes a client education approach, first checking out the boomer’s risk tolerance. For instance, she will ask boomers to specify, on a scale of 1-10, if they want to have 100% security or to take lots of risk.