An increasing number of researchers are concluding that the only way to capture the wave of baby boomers focused on retirement income will be to target their products and services to very diverse needs, based on the different characteristics of consumers.
Some would even argue that “product” alone won’t be enough. To many, it’s clear that both new and “recycled” products, along with some degree of advice and planning, will be required to adequately address the retirement income challenges facing most households.
In terms of retirement income profile, Milliman determined that boomers fall into three broad consumer segments, based on pre-retirement income, assets and net worth. These are shown in the box.
Product solutions for these segments range from narrowly targeted products to meet a specific need for the upper affluent market to simple but comprehensive products for the middle/mass market.
Some solutions are already in the market and well-known. Others are less well-known. Still others have yet to be developed. A theme running through all of the products is protection from the longevity risk–the risk of outliving assets when living beyond retirement life expectancy.
Here is an overview:
Deferred income annuities: Pure longevity protection can be provided by deferred income annuities, which guarantee income at market rates at time of issue but do not provide income until much later. For example, one can purchase at age 65 an income that will begin at age 85.
GLWB: In variable annuities, the newer guaranteed lifetime withdrawal benefit (GLWB) has a present and future role in retirement income. These optional features combine longevity protection and asset protection, while allowing policyowners to maintain control of assets. This is because the GLWBs enable the owner to make specified withdrawals from the VA for a lifetime, regardless of the contract value.
Although GLWBs are already VA market leaders, they have not yet been broadly used for true retirement planning. Going forward, they have potential to be expanded, however, so they provide inflation protection, recognize substandard lives, and include long term care benefits through increases in allowable withdrawals. The GLWB concept could also be applied to mutual funds.
GMIB: Another optional feature in VAs is the guaranteed minimum income benefit. This provides a floor of asset protection and limited income protection. In the future, these guarantees can be strengthened so they can serve as a more significant retirement protection vehicle.
Single premium immediate annuities: These traditional products will continue to play a primary role for the middle/mass market. In the other markets, they may be overshadowed by products providing more flexibility or targeted solutions. The lower affluent market may find appeal in immediate variable or equity-indexed annuities. All of these can also include inflation, substandard and LTC risk dimensions.
Home ownership. Significant assets may be tied up in home equity, but there can be advantages to converting this to a liquid asset. Reverse mortgages have historically been for the “house rich but cash poor” consumer, but a new generation of reverse mortgages responds to the needs of more affluent homeowners. These new versions will make the reverse mortgage a broader-based planning tool.
In addition to new product features, it may be time to refocus the sales message. Retirement accumulation has generally been the focus, but better awareness and income planning could be achieved with income denominated accumulations. This could be achieved with both mutual funds and annuities.
Ultimately, product design has to reflect the method used for delivering the right solution to each market. The upper affluent market may have a financial advisor team, a member of which would bring the solution to solve a specific problem. The lower affluent market may have a single financial advisor who is more likely to look for “packaged” solutions. The middle/mass market will require more basic retirement income advice and solutions, most likely provided through the worksite.
For all market segments, there are opportunities for pairing compelling retirement income product solutions with effective advice delivery.