How To Sell Annuities To Generation X
November 21, 2013 by Bill Fay
Nearly every story about annuities — or even the mention of annuities — includes a kicker to remind people that this product is for retirees or for those at the doorstep of retirement.
That might be the case for many annuity products, but a void is being created as more companies turn their back on employee retirement benefits — and annuities could help fill that void.
That is especially true for members of Generation X – people in their 30s and 40s – who should at least be thinking about how they’re going to fund the golden years, if not already acting on those thoughts.
At the moment, it’s not looking that good for the Xers.
Out of Options
Gen Xers’ grandparents, and at least some of their parents, were able to cash in on pensions. But those pensions are all but extinct for Generation X. As recently as 1998, 90 of the Fortune 100 companies sponsored some form of pension plan. That number was down to 30 in 2012 and dropping, according to an analysis by Towers Watson, which said most companies offer a hybrid form of the product. The Bureau of Labor Statistics said that only 9 percent of private companies offer pensions of any kind.
The next choice for retirement savings is either an individual retirement account (IRA) or a 401(k) program, but both of them put limits on Gen Xers. People younger than 50 may contribute only $5,500 annually to an IRA account and $17,500 annually to a 401(k) — and that’s if their employer even offers a 401(k) program. The 401(k) benefits are a staple for large corporations, but a survey by SurePayroll found that 70 percent of small businesses do not offer them at all.
And then there is Social Security. The Social Security Administration has said that, unless Congress does something soon, it won’t have money to meet obligations for retirees starting in 2033, which is about two years after the Gen X folks start walking through the retirement gate.
Where else can Gen X go to put money away for retirement and still get tax deferral?
Annuities to the Rescue
Annuities, anyone?
The answer could be yes, if you can come up with an annuity that essentially becomes a self-funded pension plan.
Gen Xers are at the time in life when they are juggling budgets around mortgages, car payments and the cost of raising children. Money for retirement is a low priority. But highlighting the tax benefits and real growth possibilities of the right annuity might be convincing enough to get their buy-in.
There are several directions to go with this. Interest rates are so low now that fixed annuities, the type that people are most familiar with, wouldn’t make much sense, and it might be a while before they do make sense.
A good choice could be a deferred variable annuity that starts with a modest deposit and allows for monthly, quarterly or annual contributions in similar fashion to what 401(k) programs offer. Clients could pick and choose the combination of stocks and mutual funds they want, based on their risk profile. Variable annuities also may include riders that guarantee an income stream during retirement years.
The real benefit comes at tax time every year. If Gen X clients were managing an account on their own, they would owe taxes on any gains at the end of each year. By putting their funds in an annuity, the investment grows without getting hit with taxes until the clients begin withdrawing the money. When they do start withdrawing the money – presumably during their retirement years – the tax rate should be lower. (If they withdraw the money before they turn 59 1/2, they will incur a 10 percent penalty.)
Annuities should appeal to members of Generation X in several other situations. Gen Xers may inherit money or receive a lump-sum payment when selling a business. Some of them may not be able to buy life insurance because of health concerns, but could self-fund a life insurance substitute through an annuity.
The point is that annuities, like all investments, gain momentum over time — and Gen Xers have time. Ignoring a whole generation because they aren’t at or close to retirement age is unwise. Someone in their 30s or 40s can buy an annuity today, build their retirement income tax-deferred and turn it into regular income when they need it.
Bill Fay is a business writer for Annuity.org, a secondary market service provider with expertise on annuities & structured settlements. Contact him at Bill.Fay@innfeedback.com.
