Firms are developing new products and repositioning old ones to vie for the business of the nation's 77 million Baby Boomers as they start planning for retirement.

"Financial products with the right balance of flexibility, growth potential and guarantees will probably be the most popular," said Matt Drinkwater, assistant director of LIMRA of Windsor, Conn.

"The wave of Baby Boomers rolling over their 401(k) assets has not even begun yet, but firms are preparing," said Susan Menke, senior financial services editor with Chicago-based Mintel International, a supplier of consumer, media and market research.

Many products will be developed that help investors make their retirement money last throughout the rest of their life. "Insurance companies are tweaking annuities, and [investors] are going have many more options," Menke said.

There is a need for retirees to feel a guaranteed sense of security, and annuities can achieve that goal. "Retirees will be increasingly concerned about running out of money, and annuities will be a good option for them," said Mathew Greenwald, president of research and consulting firm Greenwald & Associates of Washington. There are a slew of different types of annuities, and all offer payments that are guaranteed for life.

Immediate variable annuity payments fluctuate based on the performance of investments an individual chooses. If the investments do well, then income will stay ahead of inflation, but if they do poorly, income will be cut.

With equity-indexed annuities, investments grow at a guaranteed minimum rate of return. They allow investors to benefit from potential gains when the stock market is up, but also prevent investors from being penalized when it goes down. "Equity-indexed annuities have not maintained their skyrocketing growth, but are still a major segment of the fixed-annuity market," Drinkwater said. "These may be suitable for people who need safety with some upside potential, but are less concerned about liquidity or generating income immediately."

Also, complex but increasingly popular, are variable annuities with living benefits, especially guaranteed minimum withdrawal benefits (GMWB), experts said. The tax-deferred products are similar to mutual funds, as investments are placed in sub accounts. A GMWB guarantees an investor or surviving spouse 5% of their money every year for life. If the withdrawals drain the account, the insurance company continues to pay the investor from its own money. However, these types of annuities may have high fees and penalize investors who opt out of the contract early.

With a guaranteed minimum income benefit (GMIB), an investor usually invests in an annuity for a minimum of 10 years. Once the investor annuitizes, they begin receiving guaranteed fixed annuity payments regardless of the market and investment performance. Annuities with such living benefits are not well invested in yet because the mechanisms are not fully understood by financial advisors and investors, but they will become more popular over time, Greenwald predicted.

Life style, life cycle and asset-allocation funds are also likely to become increasing popular among those preparing for retirement, experts said. Volatility in the market is very important to Baby Boomers as they approach retirement because if the market drops 5%, that is 5% less to live on for the next five years, Greenwald noted.

Life cycle funds, also known as target date funds, are beneficial to investors who are not that familiar with financial investing. "They are a good option for investors who are overwhelmed and want the benefit of a professional manager," said Kathleen Beichert, a senior vice president with OppenheimerFunds of New York.

But that does not mean that investors will steer away from standard mutual funds. Experts believe they will continue to attract the lion's share of money because not only are they well diversified, but they are "the simplest, easiest and most widely available product," said John McCarthy, a vice president with Advanced Sales Corp. of Oakbrook Terrace, Ill., which conducts sales training for financial institutions.

Longevity insurance, a type of annuity that defers payments until later in life, may be another product that Baby Boomers will be interested in. People are living longer, and 60% of individuals underestimate longevity, according to a study this past July by the Society of Actuaries of Schaumburg, Ill.

Because Baby Boomers are looking for tax efficient, diversified products to invest in, retirees are also expected to invest in exchange-traded-funds. "ETFs appeal to both of those aspects and are a great solution for retirees," McCarthy said. Baby Boomers who invest in ETFs will most likely do so at the advice of an adviser, Menke added.

Regardless of which of these products appeals most to a retiree, their portfolio should be diverse and individually tailored to address their income needs, experts said. Financial advisers need to talk with clients and explain the risks and costs associated with each product. Mutual fund companies that can provide superior income-planning tools and advice for investors and planners alike will succeed in attracting Baby Boomer clients, Greenwald said.

(c) 2006 Money Management Executive and SourceMedia, Inc. All Rights Reserved.

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