Excerpt from “The Stars are Aligned for Fixed Index Annuities and Guaranteed Lifetime Withdrawal Benefits!”
I believe that the proliferation of Fixed Indexed Annuities (FIAs) are a result of many factors. However, I believe that there have been four MAJOR reasons for their success. The environment that was the very reason FIAs were created in 1995 is the environment that we have been in for the last 15 years. In other words, in 1995, there were three primary concerns that led to the creation and successful launch of FIAs:
- Fear of a bad stock market.
- Low interest rates rendering CDs, Money Markets, etc. not as great of a proposition as they once were.
- A bond market that had traditionally been considered “Safe” that had taken many by an unpleasant surprise.
- Fear of the stock market: Again, the market has been chopped in half twice over the last 15 years, while at the same time experiencing inflation. This has added to the erosion of the purchasing power of the consumers’ retirement savings. Furthermore, from its trough of 676 on March 9, 2009, the S&P 500 has climbed to 2,083 or up 208% at the time of this writing (November 2015). Considering the average bull market lasts 48 months and we are approximately 80 months into this bull market, consumers are edgy.
- Low interest rates: The downward slope in interest rates has continued. We are now 34 years (since 1981) into this downward slope. Ironically, however, consumers have flocked in droves to these low paying interest products because they are so fearful of losing their money in the stock market. There is almost $8 trillion in checking accounts and CDs, which is double the amount prior to the financial crisis. What are these products paying? In November 2015, the 10-year treasury sits at 2.3%. Today the average one-year CD is .27% and the average five-year CD is .85%. Using the rule of 72, this means that at .27%, it would take 267 years for a client’s money to double. At .85%, it would take 85 years. Needless to say, consumers are looking for more yield than what these products are offering, and thus, there is great potential for fixed index annuities.
- Fear of the Bond Market: With the 34-year decrease in interest rates that we have experienced, there have been new conversations open up among money managers, analysts, etc. about the Bond Market. Many pundits believe we are in a “bond bubble,” which, again, was one of the catalysts of the invention of FIAs. A very profound article was written in Investment News on March 10, 2013 that was titled “Fear Rising with Rates.” The Chief Investment Officer of Fixed Income at Blackrock stated: “Normally, people don’t think of treasuries as riskier than equities, but 30-year Treasuries are now more volatile than equities are.” Interest rates have been driven so low over the last 34 years that many people believe that there is only one way for rates to go, and that is up. And with bonds or bond mutual funds, what happens when interest rates increase? There is a lost value in that bond or bond fund. Again, as experienced in 1994.
- Lifetime Income Riders: Go back to the year 1900, when the life expectancy of a person was 47-years-old. Who would have ever thought that a baby born in 1900 would live to see the year 2000? This would be 100 years of age and more than double their life expectancy. However, as we know, in the year 2000, there were many of those 100-year-old “babies.” I am not suggesting that we are going to live to age 150. But, what I am suggesting is that people are living longer than anybody could have projected and medical technology continues to get stronger and stronger. Today, a 65-year-old male has the life expectancy of 85. An 85-year-old female has a life expectancy of living to age 88. When you put the two of them together, there is a 50% chance one of them will live to age 92. Therefore, there is great risk that a person will be in retirement for 30+ years.
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Annuities are designed to meet long-term needs for retirement income. They provide guarantees against the loss of premium and credited interest, and the reassurance of a death benefit for beneficiaries.
An income rider or benefit (sometimes called Guaranteed Lifetime Withdrawal benefit rider or GLWB rider) is an additional feature available with some annuities and generally optional and come with additional costs. Income benefits are designed to provide income options above and beyond the standard annuitization or free withdrawal features in annuities.
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