Avoid Stock Market Volatility with an Annuity: Carroll Ramer Explains

The volatility of the stock market has been a concern to retirees in recent times. One way to assure yourself a reliable income stream in retirement is through an annuity. Financial advisor Carroll Ramer talks about annuities and what retirees need to know in this report.

Carroll Ramer

Carroll Ramer

Ramer points out that the stock market has been volatile for the last 14 years. “For many baby boomers, this is all they’ve known.” A lot of boomers never got advice to help them allocate their assets and reduce their exposure to swings in the stock market. And as someone’s retirement date nears, there is not much time to get things resolved. For many of these people, protection of their 401(k) principal and a lifetime income stream is what they need. An annuity can provide those things.

Annuities have become more popular, Ramer suggests, because they are capable of producing a higher rate of return than CDs or bonds and because they are insulated from stock market volatility. Annuities can be complicated, Ramer notes, and can have surrender charges that last for a long time. Leaving the annuity early can carry a penalty. “People on Wall Street aren’t used to that type of mentality.” On the other hand, many Wall Street firms have added annuities to their product mix.

Anyone thinking of purchasing an annuity needs to ask some questions: What am I trying to achieve? Do I need income now, later, or not at all? Is my only goal wealth transfer? The best solution is probably to work with an advisor who can help ask the questions and work out an investor’s goals. Once the goals are clear, the right product can be selected. And some retirees don’t really need income but do need to pass on assets to a spouse or children. If the beneficiary designations are done correctly, income may pass without probate. Ramer always recommends a beneficiary review for his clients to be sure that no mistakes are made.

Carroll Ramer is a financial advisor with the Silver Lake Agency in Kasson, Minnesota. Retirement News Today is a featured network of the Sequence Media Group.

An Immediate Annuity Is a Good Income Choice, Says Guru Mark Warshawsky

Retirees always face choices about how to invest their money and what mix of investments is the best way to go. Retirement financing guru Mark Warshawsky has carried out research that suggests more retirees should consider making an immediate annuity part of their retirement portfolio. He explains his findings in this report.

Mark Warshawsky

Mark Warshawsky

Warshawsky says that the data in the study indicate that an immediate annuity would in some cases work better than a systematic withdrawal strategy like the four percent rule. The immediate annuity provides a higher return conditional on the beneficiary’s survival. In other words, the return could be better than the return using the four percent rule.

This works, Warshawsky explains because of the mortality credit. In essence, it means that, because mortalities are pooled, those who live longer get a benefit from those who pass away earlier. If a retiree’s concern is income rather than leaving a bequest for family members or others, the immediate annuity is a very good approach.

The great recession, the phasing out of pensions, and the highly-marketed concept of the lump sum retirement number can make the income decision difficult. But, Warashawsky notes, it’s a decision people have to make, difficult or not. It is a psychologically difficult choice to make for people who have watched account balances grow for years. “People get a little attached to that money.” But if you want income, you have to part with some of that money.

Warshawsky also suggests that annuitizing part of a portfolio can be a good choice that can save some money.

Mark J. Warshawsky is a visiting scholar at the Mercatus Center of George Mason University. His research interests include employer-sponsored retirement programs, social security, financial planning, health and long-term care financing, corporate and public finance, and macroeconomics. Retirement News Today is a featured network of the Sequence Media Group.

Annuity Sales Can Increase. Sam Friedman from Deloitte Center Explains How

Thousands of baby boomers are turning 65 every day, and company pension plans are more and more a thing of the past. Conditions should be ripe for a thriving annuity market. However, annuity sales were 11% lower last year, according to the LIMRA Secure Retirement Institute. Research leader Sam Friedman from the Deloitte Center discusses the situation and how it might change based on information gathered from a recent Deloitte survey.

Sam Friedman

Sam Friedman

Friedman notes that current low interest rates are part of a macroeconomic challenge and that interest rates will eventually go up. But there are other factors that insurance companies must face if they want to broaden their market base and keep sales moving forward.

In studying the situation, Deloitte looked at 1,500 individuals through an online survey, half of whom were annuity buyers. The non-buyers were further broken into those who had never considered annuities and those who had thought about it but didn’t buy. According to Friedman, the survey results suggested ways for insurance companies to “rethink and maybe reinvent the annuities market.”

One option is to focus on current annuity buyers. The survey found that four out of ten people who had bought an annuity had bought a second one. And for three out of four of this group, the newest purchase was an additional annuity, not a replacement one. This underscores the importance of the existing client base as a source for resales.

The survey also looked at increasing the size of the market base, “growing the pie.” In order to achieve this, Friedman says, the survey looked at three possibilities. One was repurposing the products—looking at some uses for an annuity besides retirement in order to reach a younger prospect base. Another suggestion was for the insurance industry to be proactive in providing information about annuities so as to cope with widespread lack of understanding of how annuities work, even among people who own annuities.

Another suggestion, Friedman says, was to “leverage the workplace channel.” Recent changes in IRS rules will help to facilitate the use of annuities in defined contribution plans. It should be easier for annuity companies to reach consumers through the workplace approach. For one thing, the IRS has made it easier to include an annuity as a distribution option in defined contribution plans. The IRS has also “set the stage for the sale of deferred compensation annuities.” Another change has been for companies to transfer their defined benefit plans to annuity companies.

Another thing that can help to boost the sale of annuities is to give individuals the option of partially annuitizing retirement funds. Most companies have an “all or nothing” approach to dealing with a retirement fund. Friedman says that some people are concerned about putting all their eggs in one basket. The survey found that people were more comfortable if they had the option of holding back some funds for other investments. And, in fact, having an option like that made people more likely to annuitize the entire amount in their retirement funds.

Summarizing, Friedman says that the most likely annuity buyer right now is someone who already has an annuity. However, if companies can reach out to and develop a younger market, they are much more likely to have annuity buyers down the road. “Starter” annuities would be a good idea.

Sam Friedman is the Insurance research leader at the Deloitte Center for Financial Services, putting his journalistic skills and three decades of industry experience to good use analyzing the latest trends and identifying the major challenges confronting the property-casualty and life insurance industries. He joined Deloitte in October 2010 after 29 years at National Underwriter P&C, where he served as editor-in chief. Retirement News Today is a featured network of the Sequence Media Group.