The focus for retirement investors has shifted in recent years from the return on principal to a return of principal.
During the economic boom of the early 2000s, investors were all about maximizing returns to build a bigger retirement nest egg. But then the financial crisis hit, depleting the value of many Americans' retirement and savings plans. Now, it's more about protecting what you have.
With market volatility and the global economic uncertainty driven by political dysfunction and the European debt crisis, there's a scarcity of safe places for your clients' money. There just aren't many options today for someone looking for a place to put cash, generate a decent return and sleep well at night, knowing with absolute certainty that money is not at risk due to market forces.
The eurozone used to be a market for safe assets, but no more. Certificates of deposit and Treasuries offer paltry returns because of low interest rates. The equity markets are marked by instability: more than one in three trading days in 2011 showed returns on the S&P 500 index equal to or greater than plus or minus 1 percent. Only the 1930s can match that degree of volatility. Some investors simply don't have the stomach for that roller coaster.
It's a perfect environment for indexed annuities, however, which offer a much smoother ride.
Indexed annuities are the right fit for many customers because of the downside protection they offer, along with the opportunity to participate in some indexed returns. If the financial market goes awry, your clients will, in the worst-case scenario, at least get their money back at the end of the surrender charge period. That's a return of principal: The client knows they will get nothing less than a zero percent return.
If the major stock index the product is linked to, typically the S&P 500, goes up, the customer shares in some of that upside without having to be concerned about downside risk. In today's investment environment, the cap is currently around 3 percent, which some would argue isn't great. But what are the alternatives? Government bonds are around 2 percent, and equities are all over the place. Putting money in an indexed annuity is better than the interest you can generate by putting it in a savings account. You don't have to worry about the potential impact of Europe's sovereign debt crisis as you would with many other investment options. And interest credits are tax-deferred.
Income products attract boomers
Our industry is seeing a growing focus on income products, as retirement strategies have shifted from amassing assets to protecting them. Indexed annuities also offer customers the opportunity to select a guaranteed lifetime income stream for retirement while locking in principal-protected cash accumulation potential. Traditional pension plans are vanishing, so consumers on the cusp of retirement are looking to secure guaranteed income coupled with the chance to participate in the upward movement of a market index.
Today's indexed annuities offer customers the opportunity to generate guaranteed income, via income riders, without having to annuitize their contracts. These income riders typically accumulate within a range of 6 percent to 8 percent and provide a future income stream that the customer cannot outlive. A customer who purchases an income rider with an indexed annuity knows with certainty the retirement paycheck that annuity will generate for the rest of his or her life.
