10 minute read
It is the ‘perfect time’ for preretirees to consider FIAs
The case for adding fixed indexed annuities in the accumulation phase of a client’s retirement portfolio.
By Susan Rupe
Impact of FIA allocation on median of $1M portfolio
The portfolio value at the end of seven years for three different FIA allocations (0%, 10% and 30% FIA)
Median is defined as 50th percentile of outcomes after seven years
+$13,000 +$18,000 +$23,000
The current market environment “could not be a more perfect time” for those who are in the “retirement red zone” to add a fixed indexed annuity to their portfolio. That was the word from Igor Zamkovsky, head of indexed annuities and insurance with Blackrock’s Retirement Insurance Group. Zamkovsky made the case for adding FIAs in the accumulation phase of a client’s retirement portfolio at a webinar presented by the National Association for Fixed Annuities.
The retirement red zone refers to the time period of roughly five years before retirement or five years after retiring.
“If you happen to be retiring in 2022 and your portfolio is down 20% and you’re not overfunded, something has to give,” Zamkovsky said.
With so many investment classes down, “having protected retirement solutions is more important than ever,” he said. “We’re in an incredibly dynamic market environment. But the overall concepts surrounding the value of FIAs are still true.”
The classic portfolio of 60% stocks and 40% bonds is under pressure in today’s environment, Zamkovsky said. The quarter ending Sept. 30 marked the third consecutive quarter of both stock and bond losses. This is the first time this occurred since 1931. Although stock volatility and valuations are elevated, bonds are less equipped to provide protection. Bond indexes have only lost money in four consecutive quarters once — in 1954 — and in three consecutive quarters three times — in 1931, 1980 and 2022. Stock indexes have lost money in six consecutive quarters twice — in 196970 and 2008-09 — in five consecutive quarters only in 1931 and in four consecutive quarters twice — in 1937-38 and 1974-75.
Meanwhile, bonds are on pace for the lowest returns since the 1960s, Zamkovsky said. As for equity funds, they have become riskier in the past 10 years, which may increase the risk of losses.
0% +$3,000
10%
13% improvement 3% decrease
20% 30% 40%
Clients want to “play it safe” with their portfolios, he said, but that strategy carries its own risks. Much like it reduces the value of money in the future, inflation also affects the true return on our investments after we take it into account. If an investment’s return is less than the inflation rate, then a return that appears positive on paper could actually be negative in real-value terms. In particular, Zamkovsky noted bond returns are at a negative 0.1% return over the past 10 years when adjusted for inflation, while bank certificates of deposit are at a negative 1.75% return and cash is at a negative 2.3% return.
“We believe liquidity is incredibly important, but too many people have too much cash on the sidelines,” he said. “Inflation is eating away at purchasing power.”
Blackrock’s research suggests that FIAs can allow for consistent equity exposure in the retirement red zone to help capture upside potential while also mitigating downside sequence-of-return risk.
Zamkovsky provided a case study showing how an FIA can be added to the portfolio of someone entering the retirement red zone.
A retirement case study
Zamkovsky said Blackrock analyzed the benefits and tradeoffs of adding partial portfolio allocations to an FIA. In its case study, Blackrock looked at a hypothetical preretiree with a 60/40 retirement portfolio. The preretiree is 58 years old, planning to retire at age 65 and has an initial portfolio of $1 million. Blackrock ran Monte Carlo
A portfolio with 20% cash (10% equity, 20% cash and 70% fixed income)
Percentage annuity allocation
A portfolio with 20% cash (10% equity, 20% cash and 70% fixed income)
Percentage change in lower bound
45 40 35 30 25 20 15 10 5 0 $4K $7K $24K $42K 45 40 35 30 25 20 15 10 5 0 $5K $14K $19K $29K
0% 10% 20% 30% 40% 0% 10% 20% 30% 40%
simulations with 5,000 return paths.
Blackrock’s simulation looked at adding an FIA funded from equities and fixed income or adding an FIA funded from fixed income. The simulation found that allocating funds to an FIA offers greater upside in the “median” scenario when suitably funded. It also found that adding an FIA reduced extreme bad outcomes in balanced portfolios. FIAs improved worst and median outcomes for conservative and cash-heavy portfolios, assuming liquidity needs had been met. Finally, the simulation found incorporating an FIA with an underlying volatility-controlled index can help provide more certainty around future portfolio values.
What impact does an FIA have on a retirement portfolio in bull markets and in bear markets? If markets keep going up, allocating some of the portfolio to an FIA “can actually decrease median value a little bit,” Zamkovsky said. But what if markets are down?
Blackrock’s analysis looked at the portfolio value at the end of seven years for three different FIA allocations: 0%, 10% and 30%. It found that in consistently positive markets (up 5% annually for seven years), a 30% allocation to an FIA led to an overall portfolio value after seven years of $1.36 million versus $1.4 million in a portfolio with no FIA allocation — a 3% decrease. Meanwhile, in consistently negative markets (down 5% annually for seven years), a 30% allocation to an FIA led to an overall portfolio value of $790,000 after seven years versus $700,000 in a portfolio with no FIA allocation — a 13% improvement.
The Blackstone simulation also looked at how to fund the FIA for the hypothetical preretiree’s portfolio.
Sourcing from fixed income: In the situation of the client’s concern that their current portfolio will not provide the upside potential needed for an adequate retirement portfolio, the challenge is that allocating 60% of the portfolio to fixed income is unable to generate the return potential the client needs to grow the portfolio. The solution is to have the client consider allocating a portion of their fixed income to an FIA to potentially provide more upside.
Impact of FIA allocation on lower bound of $1M portfolio
Lower bound is defined as extreme left tail 5th percentile of outcomes
+$61,000
+$46,000
+$19,000 +$87,000
Sourcing from equities and fixed
income: For the client who is focused on avoiding extreme downside market scenarios and is less focused on growth, the challenge is that equity funds today are riskier than they historically have been. The solution is for the client to consider allocating funds from both fixed income and equities to an FIA to provide more protection in an extreme downside scenario.
Sourcing from cash: For a client who is conservative and holds a large amount of cash and fixed income inside their portfolio, the challenge is that inflation and low bank rates could eat into the value of their assets. The solution is for the client to consider including an FIA sourced from cash and fixed income to improve the worst and the median expected outcomes.
Key takeaways for financial professionals
Zamkovsky said choosing between FIA crediting strategies and benchmarks requires an active discussion between the advisor and the client. These conversations can consider product design, index design, current cap and participation rates, median outcome expectations, and desired confidence around target outcomes.
Susan Rupe is managing editor for InsuranceNewsNet. She formerly served as communications director for an insurance agents’ association and was an award-winning newspaper reporter and editor. Contact her at Susan.Rupe@innfeedback.com. Follow her on Twitter @INNsusan.
Burnout, mental health issues plaguing the workplace
DO EMPLOYERS CARE ABOUT WORKERS’ MENTAL HEALTH?
70% percent of hybrid work-
ers believe that their organizations care about them at least a moderate amount, compared
to 56% of remote workers and
The burgeoning and critical need for mental 48% of on-site workers. health resources in the U.S. extends well beyond SOURCE: Aflac families and schools to the workplace, with more than half of employers saying that mental health issues have affected their businesses in the past year, according to the latest WorkForces Report from Aflac.
The study found that more than half (59%) of American workers are experiencing at least moderate levels of burnout, a notable increase over the 2021
QUOTABLE
Today’s consumers set aside money for college or a mortgage, but not for health care.
— Alberto Casellas, chief executive officer, Health and Wellness, Synchrony
figure of 52%. Moreover, nearly 80% of employees agreed that mental health coverage is critical, yet only 61% have access to it as part of their benefits package.
The survey also revealed some alarming findings of how much many American workers are struggling financially and are vulnerable to unexpected medical costs. More than half of respondents (58%) said they could not pay $1,000 in out-of-pocket costs. The most affected groups were Generation Z (78%), African Americans (72%) and Hispanics (65%). Across the country, medical insurers must spend at least 80% of premiums on patient care or issue rebates to customers. In Massachusetts, health insurers must spend 85%-88% of premiums on patient care.
EVEN WITH INSURANCE, HEALTH CARE COSTS CAN HIT SIX FIGURES
INFLATION CAUSING AMERICANS TO SKIMP ON HEALTH CARE
Add health care to the list of things Americans are cutting back on as they attempt to beat inflation’s erosion of their bank accounts.
A Nationwide Retirement Institute survey revealed 14% of respondents have canceled or postponed plans to see a specialist in the past 12 months, while 10% are failing to take a prescribed medication and 11% didn’t get an annual physical due to inflation. And almost one-fifth of Generation Z (17%) and millennials (19%) have canceled or postponed plans to see a mental health professional in the past year.
As Americans brace for even bigger expenses in the future, the survey finds that 1 in 10 (10%) have decreased their retirement plan contributions in the
AMERICANS ARE MAKING HEALTH CARE TRADEOFFS BECAUSE OF INFLATION
Less than a fifth of Americans (17%)
have adjusted their family’s budget to pay for health care expenses in the past 12 months.
SOURCE: Nationwide Retirement Institute
past year to pay for health care expenses, because of high inflation.
DENTAL ASSOCIATION COULD TAKE UP INSURANCE REFORM
Emboldened by a landslide election victory in Massachusetts that reformed dental insurance, the American Dental Association plans to take the issue national. Massachusetts became the first state in the nation to deliver consumer dental protections. By a margin of 71.4% to 28.6%, voters approved the measure, which will require insurance companies to spend the bulk of their customers’ premiums — 83 cents of every dollar — on patient care. The remaining 17 cents would be available to insurers to spend on costs like employee salaries, fraud protection, customer hotlines and other services.
The term for the share of premium dollars that goes toward patient care is known as the “medical loss ratio.” The law will also require greater financial disclosure. The Affordable Care Act set up a similar system for health insurers.
Consumers may believe they are off the hook for big bills if they have health insurance, but an American with an employer-sponsored health insurance plan can expect to spend more than $320,000 (including insurance premiums and out-of-pocket costs) during their adult lifetime, according to research from Synchrony. That figure goes
even higher for those who purchase individual coverage without employer or government subsidies or for those who are managing a chronic illness such as diabetes or heart disease — reaching up to $700,000 over a lifetime.
The research also showed that consumers significantly underestimate their annual health care expenditures and do not save for future health care costs, leading many to delay recommended medical procedures.
DID YOU KNOW ?
