The Top 10 Reasons Consumers Love Income Riders
August 5, 2015 by Harry Stout
David Letterman recently retired after over 30 years on television and over 6,000 shows. During his late-night comedy career, he brought entertainment innovation, creativity and much enjoyment to his audience. Perhaps, most notably, was how his nightly Top Ten Lists often brought lots of laughs.
Fixed annuity income riders are making their own impact in households throughout our country. These financial products have grown in popularity and innovation during the past decade, helping to improve retirement income security for their purchasers. Here are my top 10 reasons fixed annuity income riders have seen such continuing appeal with consumers. I suspect financial professionals will relate to this list since it can bring income security to their clients.
10. Protection Against Longevity Risk
The retirement landscape is constantly evolving, and when planning for the years ahead, many factors need to be taken into consideration. For instance, with advances in medicine, people are living longer than ever in this country. For a healthy 65-year-old couple, there is an 84 percent chance of at least one person living until age 85, and a 36 percent chance of at least one person living until they are 95.1 This can lengthen the time spent in retirement, putting significant strain on retirement savings, as people need to make those dollars last as long as possible. Income riders have shown they can provide guaranteed lifetime income to help offset the risk of outliving savings in retirement.
9. Combating Cost Inflation in Retirement
Older individuals can also be affected by what is known as “senior inflation.” This is where prices for items consumed by seniors have experienced more inflation than the official consumer price index.
Health care is one of the costs that can significantly increase in retirement. A moderately healthy 65-year-old paying about $5,000 a year for health care today could pay close to $10,000 a year at age 75 and nearly $25,000 a year by the time he or she reaches age 89.2 Costs can vary widely depending on the health of your client, as they age and where they live. This is why it’s important that your clients understand today what health care costs might be when they retire.
A majority of older adults also have unsustainable housing costs, with 59 percent of older renters and 33 percent of homeowners with mortgages spending more than 30 percent of their income on housing costs.3 Seniors also are spending more on hobbies and non-essentials than they did in the past. For 65 to 74-year-olds, for instance, two of the top five fastest-growing expenditure categories are entertainment and pets/hobbies.4
Another cost worth mentioning relates to cars and transportation. While you may think seniors are not driving as much, studies show that many older individuals do own a car. In fact, growth in new car and truck expenditures for this age group shows 79 percent of 75-year-olds and older own or lease at least one car.4
Most all of today’s income riders have roll-up rates that can create increased guaranteed lifetime payouts that can help combat the impact of rising costs.
8. Helping to Reduce the Retirement Income Gap
The proportion of preretirement income needed to maintain one’s standard of living in retirement varies according to individual circumstances. Lower-income workers typically need a higher replacement ratio than average-income workers, because they spend a higher proportion of their income on necessities such as food, clothing, housing, transportation, and medical care.
Higher-income workers, too, may need higher replacement ratios to maintain their preretirement standard of living, especially if their retirement plans include substantial spending on recreation and leisure activities. For some households, a replacement ratio of 65 percent may be adequate, while others may require a replacement ratio of 90 percent or more to maintain their desired standard of living.
To give you an idea of current worker and retirees’ behavior, the Employee Benefit Research Institute’s 2014 Retirement Confidence Survey found that half of current retirees left the labor force earlier than expected. This could be due to several reasons, including loss of job, illness or disability or needing to care for a family member. No matter the reason, having to retire earlier than expected can be an issue, especially if that individual has not saved enough or has a plan in place. Many Americans also carry what they see as a problematic amount of debt, where 44 percent of retirees report having an issue with their current level.
The question arises, are workers preparing for retirement? Per the 2014 study, 57 percent of workers and/or their spouses are currently saving for retirement – which is down from 65 percent in 2009. If workers are setting aside money, are they saving enough? Many people are trying to delay retirement as long as possible, and there are several reasons for why workers are choosing to remain in the job force.
Many workers are adjusting their expectations about retirement, perhaps in recognition of the fact that their financial preparations may be inadequate. Some are thinking they may postpone retirement, and as the 2014 EBRI Retirement Confidence Survey found, it was for a variety of reasons. The most common was due to the poor economy, followed by inadequate finances or they can’t afford to retire.
Other reasons include a change in employment situation, needing to pay for health care costs and higher than expected cost of living.
Even though many workers try to delay retirement, as we discussed, they may not have a choice and have to leave the work force early. Or if they retire when expected, but then live a very long life, the span of time spent in retirement can be extensive.
Add on the rising costs in retirement and an income gap may be created. When daily essentials cost more, retirees have less to spend on the things they enjoy. With earlier retirements and longer lives than planned, they may have less money that needs to go further.
Income riders can provide the guaranteed flow of income to help close the retirement income gap.
7. Fixed Annuity Income Riders are an Innovative Retirement Income Solution
Fixed annuity income riders were developed to supplement retirement income sources. They are an effective, innovative solution that addresses the risks of longevity, rising health care expenses, cost inflation and unplanned circumstances. The basic benefits of fixed annuity income riders can help your clients have guaranteed income for life.
6. An Alternative to Common Traditional Retirement Income Strategies
When it comes to creating retirement income, clients have many options. Some of the common traditional strategies include bank certificates of deposit (CDs), stocks and real estate. Many retirees put their assets into products that are not subject to market risks, such as CDS. Their strategy is to live off the interest but leave their principal intact. Some potential pitfalls with this approach are that CDs are not designed to provide long-term income and current interest rates are low, which can make it difficult to live solely off the interest.
Other clients may choose stocks, wanting potential market value appreciation and capital gains. Unfortunately, there is no safety of principal, nor is the income predictable or reliable.
Real estate can also be an option, offering advantages, but it also does not provide reliable retirement income and there is no lifetime guarantee of market value, rate of return or payout.
These strategies may meet certain client’s needs, but if one of their needs is guaranteed lifetime income, fixed annuity income riders may be more appropriate.
5. Continued Innovation Year In and Year Out
The industry has continued to reinvent and add new benefits to these riders each year. Recently, we have seen carriers add special income enhancements to create additional income amounts if the consumer has a long-term care event and needs additional income to pay for the costs of such events.
4. The Ability to Customize Fixed Annuities
When a client adds an optional income rider, typically for an additional cost, they can help add certainty to their future income and prepare for unpredictable events. Income riders can provide guaranteed, ongoing retirement income. Income withdrawals can be turned on when planned, or earlier if desired. In short, your clients control when income is taken.
3. Creates a Flexible Product Solution for Retirement and Financial Planning
A fixed annuity with an optional income rider can be a powerful combination, creating a flexible retirement planning tool designed to optimize guaranteed retirement income. Fixed annuities are long-term retirement vehicles designed for future planning, but can offer withdrawal options before a client retires as well if needs change.
2. The Income Rider’s Benefit Base Creates Guaranteed Growth
The majority of income riders credit growth to the benefit base on an annual basis. There are some carriers that credit the optional income rider’s growth to the benefit base daily, potentially optimizing the guaranteed retirement income for clients. Since the future is not predictable, this guaranteed growth feature for income riders provides a very strong consumer benefit.
1. Your Client Has Better Piece of Mind
As we have seen in this article, fixed annuity income riders have many features and benefits that can be very valuable to your clients. With people living longer and the time spent in retirement increasing for some individuals, a solution is necessary to add some retirement income security, protection and flexibility. Income riders can offer a guaranteed paycheck for life, an amount a client can count on each year for the rest of their lives. This is on top of the basic benefits of a fixed annuity, with the tax deferred growth potential available, allowing a client to have more assets to supplement their retirement income and to control how that asset is used.
A fixed annuity with an income rider can help a client close that retirement income gap and maintain their standard of living once they retire. All of these benefits together can help provide peace of mind by creating a guaranteed lifetime income, while allowing a client to maintain control over their money for life’s uncertainties.
