Annuities: Addressing Retirement Happiness, Advisor Objections, and Client Objections

The American College of Financial Services
July 28, 2017

In the following video series, Professor David Littell and noted retirement speaker and author, Tom Hegna, discuss the topic of income annuities and how they contribute to a retiree’s income and happiness throughout retirement, as well as how they mitigate any potential risk that may surround one’s retirement income. This segment also highlights the many benefits of income annuities for consumers while tackling common myths that surround annuities.

Creating Happiness and Peace of Mind For Clients

Tom Hegna discusses the reasons that research continues to show that retirees with more guaranteed retirement income have more retirement satisfaction.

In the video “Impact of Guaranteed Income on Retirement Happiness,” Hegna explains the correlation between guaranteed income and retirement satisfaction. People with guaranteed income and fixed annuities tend to be the happiest people in retirement. Those with the majority of their money in the form of various assets are subject to huge losses during their spending years, leaving them without adequate income in their retirement. Hegna further cites a study from Time Magazine that also claims lifetime income is the key to retirement happiness. The article advocates that securing a base level of lifetime income should be every retiree’s priority if he or she wants to “live happily ever after.” More importantly, Hegna points out that people with guaranteed income live longer than those without it. Income annuities give consumers peace of mind; annuities are a financial constant in their lives that they are able to count on, which makes for optimistic living.

Hegna: Advisors Wrongly Fear Annuities

Tom Hegna talks to financial advisors about their objections to recommending income annuities to their clients. He explains how it can benefit a financial services practice.

The next video, “Addressing Advisor’s Objections to Annuities,” acknowledges the common hesitancy that advisors have when it comes to annuities. Hegna says that advisors wrongly fear annuities reducing their abilities to acquire assets under management. In fact, he makes the claim that incorporating income annuities under an advisor’s practice is likely to dramatically increase his or her assets under management in the event of a market downfall. This, he explains, is because clients with annuities will keep a steady income in the event of a market downfall, which Hegna believes will encourage other retirees to refer themselves to the clients’ corresponding advisor. Hegna refers to Fidelity to support this; the financial services firm has sold billions of dollars in annuities, which has seemingly resulted in soaring assets under management as well as an increase in customer satisfaction to 92 percent. The bottom line, Hegna stresses, is that it is important for financial advisors to realize that not using annuities in their practices is the equivalent of not doing what is right for clients – it means leaving longevity risk on the table.

Allaying Clients' Annuity Fears

Tom Hegna addresses consumers' many objections to annuities, explaining the value of income annuities as part of a retirement plan.
In “Addressing Consumer’s Objections to Annuities,” Hegna responds to negative stigmas surrounding income annuities. Though he does admit that some “bad annuities” do exist, he also explains that it is only these bad ones that get blasted to consumers in the media. In simple terms, Hegna compares refusing income annuities to refusing one’s Social Security or pension checks – quite a hard bargain.

He further predicts that the currently low interest rates are likely to stay low for over the next 30 to 40 years given the high amounts of highly deflationary debt that will force the government to deleverage via methods such as raising taxes and cutting spending, bolstering deflationary effects. These factors, Hegna argues, in tandem with the demographics of retirees’ low spending, will result in extended low interest rates for Americans in the long run. Aside from this economic cycle, Hegna points out that now is a critical time to buy annuities. People are living longer as medical technology improves; annuity payout rates must decrease as companies wish to remain profitable. He thus encourages advisors to suggest purchasing annuities now in order to maximize their clients’ incomes.

Hegna is also aware of clients’ concerns over potential loss of control over these funds. He is confident in that, if anything, income annuities mitigate a client’s risk by guaranteeing lifelong income through retirement. The difference between annuities and investments is that with annuities there is zero market risk, sequence of returns risk, or withdrawal rate risk involved. An income annuity also reverses any deflationary effects that a market may hold, as a retiree receives a constant paycheck in a deflationary world.

Lastly, Hegna responds to the “it’s not liquid” comment that is frequently made about annuities. He says that most people overestimate their need for liquidity and underestimate the cost of meeting that need. Having a large amount of cash in a money market fund at a rate that is less than the payout rate can result in tens of thousands of dollars in losses. This cost, Hegna claims, is too high to keep an overestimated, liquid emergency fund that gains no interest and is unlikely to be utilized. In addition, when a client utilizes an income annuity, the guaranteed monthly income reduces any need for a significant liquid fund.

It is crucial for financial advisors to understand the truths and fallacies behind annuities when advising their clients in order to realize the value that income annuities can potentially bring to both themselves and their clients’ retirement lifestyles. This specific video segment also provides a client-friendly dialogue that advisors may use to translate what can be retirement-jargon-heavy. Annuities are a safe way to entirely avoid market risk, sequence of returns risk, withdrawal rate risk, and deflationary risk for a client while guaranteeing them a consistent stream of income. Meanwhile, advisors who choose to use annuities in practice have the opportunity to save their clients – and win new ones – in the event of a poorly performing economy.