The Hartford's 2010 Investment & Retirement Survey paints a telling picture of Americans' financial readiness and overall outlook. This year's study of American men and women aged 45 and older showed that, despite a recovering stock market, there is still a growing pessimism about our financial futures. In 2010, nearly 70 percent of Americans cited keeping up with daily expenses as their No. 1 priority, compared with approximately 25 percent just three years ago. And in this year's survey, 80 percent say they are less than confident that all of their retirement income sources (government plans, employer plans, and personal savings) will create enough retirement income.
These statistics come to life every day as I speak to clients. When I travel around the country and talk about variable annuities as part of an overall retirement planning strategy with financial advisors and their clients, two primary concerns emerge:
- Investors are clearly uneasy about equity market performance and volatility. They are hesitant to get back into equities even though many realize they need to make up significant ground in their retirement nest egg after the last few years.
- Investors are afraid of outliving their assets and running out of money in retirement. Americans are living much longer and stand a much greater chance of outliving their retirement savings. In addition, interest rates remain at or near record lows, making it difficult for retirees to turn assets into sufficient retirement income.
The good news is that today's variable annuity products can solidly address both of these concerns. Variable annuities come in many shapes and sizes, but they share certain common characteristics. Most of them offer features that guarantee equity market upside and limit downside risk on the investment portion of the portfolio. Most also offer some sort of guaranteed lifetime income benefit, which can provide clients with longevity protection and a retirement income baseline. Finally, most offer a guaranteed death benefit for an additional level of protection. Guarantees are, of course, based on the claims-paying ability of the issuing company, so it's important to look closely at the provider.
Given the challenges our clients face and the benefits that variable annuities can offer, it would seem that these products would sell themselves. Unfortunately, however, the benefits of variable annuities can sometimes get lost in the products' complex nature. As a financial professional, it is important that you cut through the story's complexity to clearly present the variable annuity in a way that will resonate with your client.
Growing your income garden
I suggest you do this by using an example that your client will understand: the income garden. Today's consumers, both before and during retirement, must consider the tradeoffs more than any previous generation. Regardless of how anxious your clients may be about the direction of the equity markets, today's retirement saver must continue investing for growth well into retirement to combat inflation's effect on the rising costs of health care and other retirement needs. At the same time, they must position their portfolio for protection against the risk of a prolonged and severe market downturn and of outliving one's assets.
You can illustrate this concept for clients by discussing the "income garden." Much like maintaining a garden, it's important to grow your assets while protecting what you already have in order to yield a dependable flow of retirement income. A successful income garden will achieve both of these objectives.
The garden analogy also helps illustrate the need to diversify your retirement income sources, like a gardener who should avoid relying on a single crop from year to year. The income garden scenario is a natural segue into a discussion on annuity strategies that blend a variable component, to pursue long-term market growth, and a fixed component, to deliver a baseline of guaranteed retirement income. This conversation can naturally lead to a discussion on the features and benefits of variable annuities.
It is a challenging environment, but one in which a smart and focused financial professional can truly excel in presenting annuity solutions. To be successful, you'll first need to present the concept in a language your client will understand. By focusing on process rather than product, you can prepare your client to start developing a practical plan to succeed in the new market, with annuities as a foundation. And by presenting it through an easily identifiable analogy like the "income garden," you'll increase your clients' level of understanding. These processes and analogies can't replace a formal and detailed retirement planning strategy, but they can move the dialogue in the right direction.
Bill Wolfe is a senior vice president and national director of annuity sales at The Hartford.
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Variable Annuities and the Power of Storytelling