Retirement Income Planning Needs A New Direction

The impact? Two in 5 (39%) have less than a quarter of their assets in equities.

Many know the price this fear is extracting. A quarter (23%) acknowledges that they are not investing enough to get the returns they need to be financially secure. Significantly, the survey detected an underlying interest in having more investments in equities. Most respondents indicate they expect the stock market to produce higher gains in the next 3 years than their own fixed investments.

Some concern about the market is justified, of course. But there are products on the market that can effectively address both consumer concerns and the real risks of market downturn underlying them. These products are annuities with principal protection guarantees.

One effective solution is an investment that provides people with the upside of equities, while protecting them against what they fear: a market downturn.

To this point, the NAVA survey asked: “In general, how much would you value an investment which allows you to invest in stocks, and gives you the possibility of getting the high gains that stocks can provide, with a guarantee that over the long term you would not lose money”? Half (48%) see that idea as extremely or very valuable and a third (34%) as somewhat valuable. Only 15% see no value in it.

The survey measured interest in 2 types of annuities, both of which provide the upside of market exposure with protection against loss. One annuity offers a guaranteed minimum withdrawal benefit and the other, a guaranteed minimum account balance.

The response shows significant interest in both products. Half would consider buying each based only on the brief descriptions provided. Importantly, about 2 in 3 would pay 1% a year for such a guarantee. The real cost of the guarantee (in addition to other costs intrinsic to all annuities) is about half of that.

What impact will these products have if knowledge of them grows? Ten percent say these guarantees would very likely lead them to invest more in equities and 44% say it is somewhat likely to have that impact. Thus, a positive potential is there.

In my opinion, these results are a harbinger of what is to come in retirement income planning. The paradigm of financial planning for retirees will have to change from dependence on traditional notions of asset allocation alone to new approaches.

Greater use of guarantees that permit older people to stay more invested in equities (than in traditional approaches) is one effective solution. It could help a significant proportion of retirees enhance chances for a financially secure retirement.

Mathew Greenwald is president of Mathew Greenwald & Associates, Washington, D.C. His e-mail address is .