As Baby Boomers age into retirement, the need for secure income rises. But are seniors informed about the best products to protect their financial future?
Fewer people are pocketing income from annuities or pensions, according to 2016 taxpayer data recently released by the IRS. That year, about 28 million taxpayers reported taxable earnings from a private pension or annuity, a drop of 1.2% from the previous year.
The IRS charted the same trend in 2015, when the percentage of taxpayers receiving pension and annuity income declined by 0.5%. There was one bright spot: the money those taxpayers obtained from an annuity or pension rose 1.6% in 2016 to an average of $25,200. That was on top of a 4.3% increase in 2015.
65+ Population Grows, but Annuity Income Doesn’t
A decline in pension and annuity income coincides with the swelling ranks of people aged 65 and older, indicating that many retirees may not have sufficient financial resources during their retirement. According to the Census Bureau, the cohort of Americans in this age bracket climbed 3.6% to 44.9 million during the same period that the IRS reported fewer taxpayers had received pension and annuity income.
The ranks of retirement-age folks is only projected to grow in the coming years, with experts projecting an increase from the current 46 million to more than 98 million by 2060. This means that seniors will account for nearly a quarter of the overall population, up from today’s 15%. Given the surge in the number of Americans in retirement or nearing it, the need for steady income will increase as well.
Why Annuities, and Why Now?
As interest rates slowly creep up, the allure of investing in products such as fixed annuities will grow in tandem. Compared to CDs, fixed annuities offer potentially higher returns and principal protection, not to mention the security of a steady income once it’s time to retire.
To be sure, the life and annuity industry as a whole has been stung by low interest rates that have dampened insurer investment yields. A.M. Best reports that in 2017, the sector achieved full-year statutory pre-tax net operating gains of $62 billion in 2017, a 7.4% drop-off from $67.2 billion in 2016. Perhaps reflecting IRS data, individual annuity direct written premiums slumped 22% last year.
However, as interest rates rise throughout 2018, A.M. Best predicts fixed annuities will capture more retirement investment dollars from consumers going forward. That, in turn, will cause a slight hike in fixed annuity premiums.
What This Means for Agents
Insurance agents who sell annuities as part of their offering should be prepared for a renewed interest in the product should current economic trends continue. And, since fewer of your clients can rely on a pension when they retire, changes in the way people work and the way companies help them save for their lives after their career will likely factor into the equation.
Indeed, statistics from the Pension Rights Center found 31% of those 65 and older received a pension in 2016. With that percentage expected to decline as companies phase out the savings plan, clients and prospects will need to seek other sources of income to guarantee their quality of life during their golden years.
For these clients, fixed annuities that promise stable, predictable income not influenced by wild market swings — although market gains are capped to some degree — are ideal. As interest rates climb and the nature of work-sponsored savings evolve, now may be the right time to start discussing annuities with your clients.