The Need For Steady Retirement Income Has Become Overwhelming

When I was a boy of 9, my widowed grandmother moved in with us. In those days, elderly parents were looked after by their kids. Years later, those kids became the elderly parents to be looked after. That?s the way it was, and it stayed that way, even into the 1960s.

But no more. Today, the kids are still great and still reliable. But they have their own busy, worrisome lives. Worse, maybe, than their parents ever had. So, wouldn?t it be better for all concerned if we elderly parents just moved into that nice, nearby retirement home? But oh, by the way, it?s very costly.

That leads me to the conclusion that the need for a reliable income stream when you retire is overwhelming.

Come to think of it, the insurance industry happens to be in The Reliable Income Stream Business. Or is it? The industry?s track record is pretty spotty, as Table 1 shows.

As is evident, there are 2 approaches to the income stream: (1) the defined benefit; and (2) the defined contribution. Only the former provides a pure vanilla guaranteed income stream. The latter provides it only if the accumulated contributions are adequate and are converted to lifetime income at retirement.

All evidence is that since 1976 the industry has been fleeing defined benefit and embracing defined contribution. Maybe it was inevitable. With life expectancy increasing, no one seems willing to take on the uncertain lifetime-payment risk.

But wait a minute. There is a case to be made for the modern annuity. Far more is now known about annuitant mortality and trends than in any other era. And, annuitant funding is stable. For instance, annuities that actually are paying income and that have no commutation feature can have no sudden demands for unexpected large cash payments. This is different from some other financial products. Maybe there?s an opportunity here, after all.

Since the defined benefit system is still in decline, the accumulated contributions may just have to provide the income streams needed. So, what streams are needed? Progress has been made in answering that question, and industry practitioners can do a lot of good for clients by just answering that question. Table 2 shows the kind of thing I have in mind. It is a mere illustration. It needs to be custom-tailored for the specific situation (including ailments) of each individual and couple. But this at least shows the kind of information that will help advisors and clients make informed decisions.

As an aside, the insurance industry is just about to find ways to market a new tool that consumers can use to fund that extra income needed in the sick periods: The Health Savings Account! But income to support lifestyle remains the major goal.

Maybe Mickey Mantle said it best: “If I knew I was going to live that long, I would have taken better care of myself.”

John M. Bragg, FSA, ACAS, MAAA, is actuarial consultant at John M. Bragg and Associates, Atlanta; past president of Society of Actuaries; and past CEO of Life Insurance Company of Georgia. You can e-mail him at nbk@mindspring.com.


Reproduced from National Underwriter Life & Health/Financial Services Edition, September 3, 2004. Copyright 2004 by The National Underwriter Company in the serial publication. All rights reserved.Copyright in this article as an independent work may be held by the author.