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Retirement Planning > Retirement Investing

Zeroing In On A Retirement Income 'Sweet Spot'

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Product developers and marketers have identified what is commonly referred to as the Affluent segment of pre-retirement consumers (see chart). These are the 2nd tier of baby boomers, based on income, assets, and net worth, ranking just below the top tier, the Upper Affluent.

The Affluent represent 15% of boomer households and, for financial advisors and companies, they are in the retirement income product “sweet spot.”

How so? This segment represents a relatively large number of households with significant assets, and a relatively homogenous set of needs for retirement income products and services. The Affluent are also more likely to place a high value on the guarantee features inherent in many new products and features than are the Upper Affluent.

As many researchers have observed, accumulating sufficient retirement funds is a significant task, but that addresses only the first half of the retirement preparedness challenge. Developing a strategy to assure that the funds provide a lifetime income for planned and unplanned expenditures is the new primary task for those households that are in the “sweet spot.”

Only annuities can provide a lifetime income guarantee, and their use can reduce the amount of assets needed to provide a secure retirement. Here are some of the new products and solutions that are becoming available for this purpose:

Guaranteed living benefits. Whether available on variable annuities, index annuities, or fixed annuities, guaranteed lifetime withdrawal benefits features provide a lifetime income floor while still allowing flexible control of the assets.

With a VA, this allows continued investment of the assets in a fashion that has the potential to more than cover the amount of the withdrawals. Adding an inflation adjustment to the withdrawal limit can improve the fit even better. The unique characteristic of GLWBs is that they provide “investment protection denominated in longevity protection.”

Guaranteed minimum income benefits. These features are structured to address retirement income needs directly. Current guarantees are oriented to investment protection, but a strengthening of the guarantees could move the focus more strongly to retirement income planning.

Annuitization. Yes, due to several new product offerings, the “A” word is no longer the anathema to financial advisors and consumers that it once was.

Whether single premium or multiple premiums, and whether an immediate or deferred start, annuitization is increasingly understood as the feature that provides “longevity insurance.”

It also reduces the amount of assets needed for retirement. That is because the structured conversion of principal into income inherent in annuitization maximizes income and reduces or eliminates the need for contingency funds for adverse investment results.

Included is this category are the “SPIA Family” of products (single premium immediate annuities on a fixed, variable with payout floor, or indexed basis). They provide maximum income and longevity protection, and reduce or remove investment concerns. If used as one piece of a broader retirement income program, an allocation to the income annuity may address the more conservative end of investment allocation, thus permitting more aggressive investing with the balance of the assets. It also reduces the required amount of total assets.

Deferred-start income annuities can be the perfect complement to a structured withdrawal program. If the annuities are structured to accept premiums early and provide an income at a late age, such as 85, they provide the purest form of longevity insurance at low cost.

Such annuities guarantee a predictable lifetime income at an age when the retiree may no longer want to or be able to manage investments. It also relieves some pressure on managing retirement assets prior to the annuity start date because it shortens the horizon for asset management. This additionally reduces the size of necessary investment contingency funds.

Combination products with long-term care protection. Both accumulation annuities and income annuities can be designed to provide additional accumulation or income during LTC confinement.

A more targeted annuity can be drawn down during the early period, e.g., 2 years, of LTC and provide extended LTC income for a period thereafter, e.g., 4 years. These approaches can reduce or eliminate the need for an LTC contingency fund, while leaving assets intact if the LTC need does not arise.

In addition to these new product solutions, and definitely as important as the products themselves, is the analytical and advice processes that will build a coordinated strategy for deployment of the products. Households in the “sweet spot” will need such processes to address such questions as the following:

1) How much of my retirement income should come from a guaranteed income stream? Guaranteed income streams will involve giving up some upside potential on investments.

2) How much liquidity can I give up in order to maximize the effect of mortality pooling? That is, what percentage of my assets could I dedicate to an income stream that will not provide a lump sum cash value? Giving up absolute liquidity provides significantly higher income potential from a given set of assets.

3) What is the most efficient method for covering LTC contingencies? What percentage of my assets could I dedicate to provide for LTC expenses for a limited period (e.g., 2 years)?

An analysis and advice process that answers these questions by providing a set of cohesive, coordinated products will be required to adequately address the needs of Affluent households and the financial advisors who serve them.

Noel Abkemeier, F.S.A., is a consulting actuary in the Williamsburg, Va., office of Milliman, Inc. and Brent Hamann is a senior consultant at Milliman’s Chicago office. Their respective e-mail addresses are , and .


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