With Americans living longer and deferring retirement for lots of reasons, the retirement planning landscape is changing. Employers are not offering pensions, and the age to maximize Social Security benefits is increasing. All these factors make planning for retirement income crucial. I explore this in depth with Matt DiGangi.
Matt DiGangi is head of annuity distribution at MassMutual Strategic Distributors, a division of MassMutual, now offering diverse product solutions across the industry, all backed by the strength of MassMutual.
He started the third-party annuity business for MassMutual in 2013 and has grown it to over $9.5 billion in annual sales. In his expanded role, Matt builds and grows strategic partnerships and oversees the company’s overall third-party distribution strategy, including wholesaling, key account management, marketing strategy, client services and delivery.
During Matt’s more than two decades with MassMutual, he also provided leadership in the distribution of annuity, life, disability income, and long-term care insurance products in domestic and international markets. His financial services career began in a variety of service and sales positions with American Skandia.
Matt is a member of the LIMRA Annuity Executive Advisory Board and actively participates in several industry roundtables.
Matt maintains his CLTC designation, series 6 and 26 licenses. He is a graduate of Sacred Heart University and earned his MBA from Quinnipiac University.
This article is based on a podcast I did with Matt on November 13, 2023.
What are some of the key risks clients underestimate when they plan for retirement?
There are a few different ways I think about the risks in retirement. The first is longevity. Based on 2023 mortality tables that MassMutual adheres to, there's a 71% chance that one or both people who are currently at age 65 will live to age 90. The percentage of folks who are centurions grows with the advances in healthcare. It's not uncommon to see birthday cards for a hundred-plus year old in your local drugstore. When you think back 20 years ago, you had to hunt around to find a card. Now you see them a lot more, and we all know people who are reaching that centurion mark.
The second one is health care. Healthview Services did a 2021 retirement healthcare cost report; the cost of care for somebody retiring at age 65 can range anywhere from approximately $156,000 to $1,000,000. That can be a large sum of money. That's why it's critically important in this conversation to talk about long-term care, as those expenses could derail a retirement plan if not planned for properly.
When we talk about market risks, there's retirement timing risk, which means sequence-of-return risk. When we hit our normal retirement age of 67, we don't know if the market's going to be down, flat, or up. Retiring into a down market can mean delaying retirement if you don't have protections in your portfolio.
The other piece is around market volatility, staying the course, and weathering the ups and downs as people get closer to retirement. Sometimes people invest too conservatively. We want to find a good balance.
You mentioned underestimating. There are pieces that clients underestimate: housing costs, inflation impacts, and how much they will spend in retirement. But there's also a potential for people to overestimate some things: how much income they can safely get from their assets. We've all seen surveys of clients about what a safe withdrawal rate is. There's a wide range of responses that are above what we look at as safe withdrawal rates in the industry.
The other one people think about is deciding when to take Social Security and maximize their benefits or the potential for policy changes that might impact their benefits. There's a wide range of items that people either underestimate or overestimate as they think about their retirement risks.
Going back to your first point about longevity, according to the National Institute of Health, people are living longer, and that means their retirement years may account for up to a third of their lives. How are you seeing financial professionals help their clients plan for a potential 30-year retirement?
Before financial professionals get to the products or solutions that they can use with clients, I like to start with what I call our “four-box” strategy. That's a process to help people. A financial professional can work with a client and walk through this process. It's taking this time to understand both necessary and discretionary expenses that they'll have in retirement and the sources of income that they're going to have to cover those expenses. That's looking at guaranteed income, whether it's from pensions, Social Security or potentially annuities, and how those cover their necessary expenses. We like to look at this four-box plan of necessary expenses, discretionary expenses, guaranteed income covering those necessary expenses, and then other sources to cover their discretionary expenses.
At MassMutual, we've tried to simplify this. We created an income-gap calculator to help clients begin their planning conversation with their financial professionals. It asks them to enter their current expenses and project things out into the future. It includes inflation estimates and helps us think through these necessary and discretionary expenses. If your necessary expenses are higher than your pension and Social Security income, then we can start a discussion about ways to close that gap and how annuities might be part of that conversation.
One of those four boxes you mentioned includes annuities. Is now the right time for annuities?
Annuities can be appropriate in a lot of economic times and scenarios because they have the unique ability to provide lifetime income. Over the last few years, interest rates have been very favorable for investors. Income annuities provide lifetime income through retirement, helping solve longevity risk and the risk of outliving your assets. Income annuities are very efficient in providing the greatest of income relative to systematic withdrawal plans or providing a level income using less assets.
Let me give you an example. Let's take a woman, age 67, with a $100,000 in assets. With a safe withdrawal rate of 4% (and we can debate another time what is a safe withdrawal rate for retirement portfolios), that $100,000 generates $4,000 a year in income.
If you invest the same $100,000 in a single-premium immediate annuity (SPIA), that same 67-year-old woman can purchase a SPIA with a cash refund as an option. That will generate over $7,000 in income at current rates.
When I talk about SPIAs being efficient, consider if you were looking for that $4,000 a year in income. You need $100,000 in assets with that 4% safe withdrawal rate. But if we look at the same SPIA payouts, you could generate that same amount of income with $56,000 in assets, a lot less than the $100,000. It frees up a lot of capital for you to invest, spend or do other things with.
Those payouts are today's rates and will change over time. But regardless of interest rates, there's a lot of leverage in income annuities. When considering these strategies, it's important to work through the pluses and the minuses and see what's right for your client.
On the fixed annuity side, because of the unique tax advantages of non-qualifying annuities, conservative investors might look at an annuity versus a CD, with higher rates, tax deferral, and other benefits.
As you think about the fixed component of your investment portfolio, which is typically in money markets, CDs, bonds and bond funds, fixed-deferred annuities are an alternative to protect the principal from loss and provide guaranteed returns. We all saw in 2022 the inverse relationship of rising interest rates to bond values and how they can impact a portfolio. Fixed annuities provide principal protection as well as guaranteed returns.
There are other solutions when we think about fixed-index or registered-index-linked annuities. As you think about accumulation, while these solutions do not invest directly in the market, they track the performance of market indexes. You could look at different options for different levels of downside protection in exchange for different cap-growth potential. Those solutions can give you downside protection with upside potential for part of your portfolio. They offer equity-market, upside participation and have some downside protection.
There is the variable annuity sleeve. Although the stock market might seem volatile, unlike index-linked annuities, if you purchase a variable annuity, the potential for upside is uncapped. Some variable annuities have optional income riders where, for an additional fee, you can capture market growth and turn that into lifetime income as well.
As you look at annuity solutions, it's important to consider all the pluses and minuses of each one and make sure it's appropriate for your client.
We're talking about using these solutions as a portion or a component of your overall portfolio. We're not saying put all your money in this piece. Look at how these solutions work within the larger picture. One of the biggest challenges, especially for the baby boomer generations, is a huge decrease in pensions that are being offered. Without these pensions, we need to create our own personal pensions. This is where annuities help do that with lifetime income that you cannot outlive.
I follow the research that MassMutual sponsors. You work with a firm called Greenwald Research, which did some research in May of 2023. I looked at both its consumer and advisor surveys about fixed annuities and buyer sentiment over the prior two years. What are some insights from that latest research?
One that I'll highlight is, especially in response to this challenging economy, that it is apparent that consumers are seeking safety and increasing the fixed-income share of their portfolio. In fact, half of consumers, 52%, reported changing their investment allocation in the past year.
There was more interest in younger prospects. Advisors have underestimated the potential for the younger generation. There's more interest than folks think when it comes to annuities with some younger-age groups. According to the survey, clients are now more receptive to learning about fixed annuities. There's greater potential for educating clients about annuities.
One of the most fascinating statistics that we found in our study is that 85% of consumers who discussed fixed annuities extensively with their advisor are highly likely to recommend their advisor to their friends and family. Among those who haven't had the discussion about annuities, only 58% are likely to recommend that advisor to their friends and family. That's a pretty big increase in satisfaction with the advisor and the ability to get referrals and recommend them to friends and family.
You mentioned income riders earlier. Living benefits are a hot topic across fixed, indexed and variable annuities. What are they, how do they benefit a client and what should the advisor be looking out for when choosing the optimal product or rider for their clients?
Guaranteed lifetime withdrawal benefit riders have been around for quite some time. For an additional fee, clients can add this rider to their annuity solution, and these riders provide lifetime income benefits with flexibility on how and when they want to receive their income in retirement. They offer downside protection, the ability to capture the upside potential and create greater amounts of lifetime income no matter how much value is left in the contract.
When we think about the risks in retirement, these riders protect against longevity risk by providing lifetime income to the client that they cannot outlive. It also protects against market risks, against when they retire. They don't know what the market will be when they retire. With these protections and riders, it doesn't matter what's going on in the market at that time. That income protection will be there.
When an advisor is evaluating those product solutions, the first step is always to understand the client’s needs, their risk tolerance, and their retirement timeframes, as each of these solutions has a wide range of conservative to aggressive investing and anywhere in between with different levels of protection and upside. I always start with what we are trying to solve for the client. What is their risk tolerance? What are their timeframes?
As we discussed earlier, we're talking about using this for a portion of their portfolio. Critical to this conversation when you're evaluating these solutions, I look at the company providing these solutions. The benefits are backed by the financial strength of the company providing them. These benefits, especially lifetime income, could be paid out over 30- or 40-plus years. It's important that you work with a trusted company when you're providing these solutions to your clients.
When you think back at the results of this Greenwald study and the sentiment that you're seeing in the market among consumers and advisors, how should advisors start talking with their clients about planning for their retirement and the potential gaps that they need to close?
It's never too early to begin this conversation. Good financial professionals start by giving their clients an overview of their process and what this conversation will look like.
The second piece is to discuss what their clients think retirement looks like. Many people underestimate how hard it is to articulate what they see retirement looking like for themselves. Ask some questions that clarify what they think retirement might look like. Through that conversation, you uncover those potential expenses that they might not even be thinking about. This helps connect the right brain of thinking about retirement with the left brain as you go into the planning portion of the discussion.
With that four-box strategy, you can outline a true sense of what their necessary and discretionary expenses will be in retirement. People have different perspectives on what those things are, and they mean different things to different people. It's a great opportunity to ask questions as you take them through the process. Take an inventory of their assets and what lifetime income already have in place with pensions and Social Security. Our calculator can help you with this.
Look at their portfolio, seeing where annuities might be a potential fit with their income and accumulation protection properties and the ability to be an alternative to CDs. Explain how annuities work. There's a lot of resources available to help clients with this process, and there are many great tools. Educate clients about the annuity solutions that are available and the potential that they might have. Work through the process of incorporating them into the discussion and evaluating if it makes sense to use an annuity for that client.
If there's one key takeaway that you would like to leave for advisors about how to raise awareness about the need for retirement income with their clients, what would that be?
There's a huge opportunity to engage with clients and educate them about the potential uses of annuity solutions in a client portfolio. That is the biggest opportunity that I see. As we've seen from our survey, customer satisfaction with a financial professional increases dramatically when annuities are part of the conversation. In the long run, this creates stronger client retention for the financial professional and a better referral base for them to build their business.
Robert Huebscher is the founder of Advisor Perspectives and a vice chairman of VettaFi.
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