Financial professionals and their clients were recently reminded that planning for retirement income means preparing for possible inflationary surges and market downturns, not just the risk of living longer. Where can finance professionals look for strategies to support their clients in these conditions? InvestmentNews Create spoke with Mike Downing, COO of Athene, about opportunities for finance professionals to address the need for protection and, in some cases, the ongoing need for accumulation.
InvestmentNews Create: How are heightened market volatility and renewed inflation concerns affecting financial professionals and clients as they plan for retirement?
Mike Downing: Retiring in a bear market means retiring from a shrinking nest egg. Someone who invests a high proportion of their investments in equity-like instruments may suffer a direct hit that can impact their nest egg throughout their retirement. For example, if this nest egg was just enough to create an expected lifetime income using the traditional 4% drawdown rule, in less than a year someone could go from having sufficient retirement funds for the rest of his life to a lack. So, market volatility can create a lot of challenges, risks and stress, and inflation concerns only add to that.
InvestmentNews Create: What is the current thinking on ways to use an annuity, especially in a rising interest rate environment?
Mike Downing: Laddering can be a great strategy. Annuities are offered in several durations: three, five, seven, 10 or even 15 years. This allows pre-retirees/retirees great flexibility in how they create a ladder. For example, someone could ladder a five-year series of annuities or a seven-year series.
These simpler vehicles and shorter terms can help ensure clients have access to their capital throughout retirement.
InvestmentNews Create: We also hear a lot about new forms of annuities, and it can be confusing. What should finance professionals know?
Mike Downing: I think a lot of finance professionals don’t realize how versatile annuities are – it’s really impressive when you understand the different types.
The best-known annuity is the pure “safety” game, with a guaranteed interest rate for a fixed period. It offers absolute protection against volatility and allows the client to obtain stable returns over time. To respond to inflation over time, financial professionals should consider a laddering strategy, as discussed above.
The fixed indexed annuity can offer more growth potential with the cap or participation rate while providing absolute downside and market risk protection. It allows greater growth potential for those who want to accumulate retirement savings and protect themselves from market volatility.
We are seeing rapid growth in the indexed registered annuity (RILA), which is attracting a younger clientele. This annuity allows for a much wider range of outcomes and reaches clients on their own risk/return terms.
In exchange for absorbing a percentage of any market loss, the client receives interest credits that can equal or even exceed the index gains. For example, if the client agrees to take the first 10% of market losses and the index drops 5%, he would lose 5%. But if the index falls by 15% or 20%, the loss is capped at 10%. RILAs balance significant growth potential with a level of market risk protection.
In reality, annuities can be a bridge, a way for pre-retirees or retirees to move from equity and accumulation to capital security and protection.
InvestmentNews Create: When looking at a client’s overall retirement portfolio, what percentage should typically include annuity products?
Mike Downing: The way finance professionals use these products is changing as new products come to market. They really should weigh the client’s retirement goals alongside the features of the annuity to ensure the option makes sense for the client’s long-term strategy.
The old rule of thumb of allocating about 30% of a portfolio to protection still applies in the realm of traditional annuities. For these RILA products, however, this proportion could reach up to 60% due to their flexibility. They are really starting to approach the upside of the stock and can still offer some downside protection.
Clients really need their finance professional to look at what works for them because these new products are so different. Financial professionals who haven’t really looked at annuities in a while should revisit them in the context of a world in which we see more volatility and inflation in the markets. When they do, they will find real value because of the innovation that has taken place in the insurance industry over the past 10 years.
This document has been prepared for informational purposes only and is not intended to provide, and should not be relied upon for, tax, legal or accounting advice. You should consult your own tax, legal and accounting advisors before engaging in any transaction.
Not affiliated with or endorsed by the Social Security Administration or any government agency. This material contains educational information regarding availability and details surrounding the Social Security program and is not intended to promote any product or service offered by Athene. The information represents a general understanding of the Social Security program and should not be considered personalized advice regarding Social Security, taxation, or legal advice. The details of the social security program are subject to change. A tax or legal advisor should be consulted before making any decision. Visit www.ssa.gov for more details.
For professional financial use only. Not for use with the offering or sale of annuities.
Guarantees provided by annuities are subject to the financial strength of the issuing insurance company. Guaranteed lifetime income is available through an annuity or the purchase of an optional income rider for a fee.
Indexed annuities are not stock market investments and do not participate directly in stock or equity investments. Market indices may not include dividends paid on the underlying shares and therefore may not reflect the total return of the underlying shares; neither an index nor any market indexed annuity is comparable to a direct investment in stock markets.
Athene Annuity and Life Company (61689), headquartered in West Des Moines, Iowa, and issues annuities in 49 states (excluding NY) and DC, and Athene Annuity & Life Assurance Company of New York (68039), whose headquartered in Pearl River, New York, and issuing annuities in New York, do not undertake to provide investment advice to anyone or in any individual situation, and therefore none of the foregoing should not be construed as investment advice.
ATHENE ANNUITIES ARE INSURANCE INDUSTRY PRODUCTS AND ARE NOT GUARANTEED BY ANY BANK OR INSURED BY ANY FDIC OR NCUA/NCUSIF. MAY LOSE VALUE. NO BANK/CREDIT GUARANTEE. NOT A DEPOSIT. NOT INSURED BY ANY FEDERAL GOVERNMENT AGENCY. CAN ONLY BE OFFERED BY AN AUTHORIZED INSURANCE AGENT.