With the prevailing mindset around retirement planning today being one of accumulation, retirees often are left ill-prepared to shift their focus to generating income. Successfully converting accumulated assets into an efficient lifetime income stream is a very real challenge for retirees and their advisers. How can retirees get the most out of their assets during retirement while ensuring they don't run out of money too early?
There's a need for a new way to help retirees tackle their income challenges. Annuities in general are designed for this purpose, but they're typically heavily focused either on growth potential or guarantees.
Current retirement income products, while serving an important role, miss the mark in striking an optimal balance between investment opportunity and income protection for discretionary lifestyle dollars that define a fulfilling retirement for many.
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The resulting polarization between guaranteed income and growth opportunity leaves an underserved segment of the population in the middle, taking income from non-guaranteed vehicles via systematic withdrawals or payments from dividends or interest. Annuity companies have the opportunity to focus on this market with new product designs that integrate managed withdrawal strategies with longevity protection on an open, flexible investment platform.
NO SILVER BULLET
Even among professional money managers and advisers, the "safe” withdrawal rate for retirees is debated to be anywhere from 3% to 6%. Retirement asset allocation strategies also vary, with some now shifting to a higher percentage of equity exposure during the later years of retirement in order to foster growth and inflation protection.
While life insurance companies have done a good job helping retirees generate lifetime income from immediate annuities, fixed indexed annuities (FIAs) and variable annuities (VAs), these products are not suitable for every situation.
(Related read: Fixed indexed annuity sales gaining on VAs)
With these products, the insurance company must support guaranteed income with conservative investment, and income levels that reflect the current low-interest-rate environment, lessening withdrawal strategy risk, but leaving little flexibility for retirees. Plus, if the money is not for essential living expenses, retirees may be paying for guarantees they don't necessarily need and forgoing the opportunity to offset inflation and enhance their lifestyle with additional income from any market appreciation.
The adviser's role is also minimized in traditional variable annuity products, as investment options are often limited in favor of managed risk funds or investment models. The ability to customize a portfolio to each client's unique needs is an important service that advisers should be able to offer.
Other retirees and advisers use non-guaranteed products to take systematic withdrawals or interest payments. While this allows the retiree to participate in market appreciation, the lack of longevity protection makes it difficult to know how much it is safe to withdraw each year. Retirees are caught in the middle between possibly forgoing a higher standard of living than they might otherwise afford and risking depleting their assets too early.
THE NEXT ANNUITY FRONTIER
As product development strategists strive to address retirement income challenges, they'll be looking at the common risks retirees face and how to tailor solutions that help address the challenges:
• For inflation risk, the focus is on investment flexibility and growth — retirees need access to a diverse selection of investment options in order to capture growth opportunities and keep pace with inflation.
• For withdrawal and lifestyle risk, the focus is on adaptive income — retirees need to manage withdrawals to reflect investment performance, thereby maximizing income and stretching assets.
• For the risk of outliving assets, the focus is on incorporating longevity protection — retirees are living longer and need to plan for advanced age. A couple age 65 faces a 50% chance one will live to age 93 and a 25% chance one will live to age 97.
Annuities are well-suited to serve as a platform to address retirement income management.
There is a place in the market for products that allow retirees and their advisers to make the asset allocation decisions, while providing a mechanism to ensure that withdrawals are responsive to realized investment performance, with longevity protection that will continue the income stream at the same level after the account value is exhausted.
Michael Reardon is the head of product strategy for Global Atlantic Financial Group.