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Going, Going, Gone |
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You’ve told your client about the wonders of an immediate annuity, but she thinks she can generate more retirement income on her own. Is she right? |
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Americans are finally getting the message that retirement may not be the slam dunk they thought it would be. A recent poll found that working Americans aged 50 to 70 years old are now far more concerned about making their retirement savings last a lifetime (50 percent) than they are about saving enough for retirement (38 percent).1
“Longevity can be a blessing if you have both health and money,” said Kim McSheridan, vice president of Income Annuities for Symetra Life Insurance Co. “An income annuity can go a long ways in helping your clients make their money last as long as they do. Problem is, many people think they can do better on their own.”
Maybe they can. But are they prepared to gamble their retirement on it?
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Making $100,000 Stretch
Let’s say your 65-year-old client has Social Security, a small pension and $100,000 set aside for supplemental retirement income. She plans to put this portion of her savings into either bonds or an income annuity.2
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In our first scenario, she purchases a life-only income annuity, which today would generate $7,972.27 per year for life — an internal rate of return of 5.78 percent.3 Simple enough.
In our second scenario, she decides to try to duplicate the income created by the annuity by putting $100,000 into a high-quality bond fund. What she may not know is that some bond funds may be more volatile than many investors think they are. When interest rates rise, as they are now, bond prices fall.
“Bond funds can, and sometimes do, lose money,” said McSheridan.
The average government securities fund, for example, has fallen 0.8 percent this year. The losses aren’t usually as dramatic as they can be in the stock market, but when the bear bites experts say it tends to linger; sometimes for up to a decade.4
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In our second scenario, however, we’re going to assume our client’s bond fund performs well. To keep it simple, we’ll use the Lehman 10 Year Municipal Bond Index, which has had a healthy average annual yield of 5.76 percent over the past 10 years.5
After the first year the fund climbs to $105,760. She withdraws $7,972 leaving $97,788. Over the next 12 months she earns back $5,632 bringing her total back to $103,420. She continues this pattern for the next 10 years, bringing her remaining balance to just over $67,000. Not too bad.
Here’s the thing: As she continues to withdraw $7,972 each year the interest she earns shrinks with her fund balance. By the time she reaches 85, the account would dwindle to less than $3,000 — the end of the road for her supplemental retirement income.
Making a Long Life a Good Life
The problem is, at 75 years old the average American woman can look forward to an additional 12.6 years of life.6 That means the woman in our example above could reasonably expect to live to age 87, or beyond.
“Unfortunately, when seniors run out of money few have the resources to recover from a financial mistake like this one. It’s just not realistic for most 80-year-olds to re-enter the workforce,” said McSheridan. “As we age, it becomes increasingly reassuring to know that we have an income source we’ll never outlive.”
For clients who are worried about giving up the ability to pass remaining assets to a beneficiary, period certain, joint-and-survivor and installment refund guarantees can all go a long way in alleviating these understandable concerns. If inflation is troubling them, annual increases can be built into the annuity payments as well.
To learn more about income annuities, contact the Sales Center at invest@symetra.com or 1-800-706-0700.
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1 Insurance Newscast, “New Poll Shows Americans More Worried About Making Retirement Savings Last Than Saving in General ,” Americans for Secure Retirement poll, May 5, 2006.
2 For illustration purposes only. Individual results may vary. Rates of return are subject to change.
3 Based on a Symetra Express quote for Symetra Advantage Income Immediate Annuity, generated on May 15, 2006.
4 John Waggoner, “A Survival Guide for a Bear Market in Bonds,” USA Today, March 10, 2006.
5 Based on performance numbers posted on Vanguard’s “Benchmark Returns” page, featuring average annual total returns as of April 30, 2006.
6 National Center for Health Statistics, “Health, United States, 2005/With Chartbook on Trends in the Health of Americans,” Table 27, p. 184, Hyattsville, Maryland: 2005.
Income annuities are issued by Symetra Life Insurance Co., 777 108th Avenue NE, Suite 1200, Bellevue, WA 98004, and are not available in all states.
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