With the potential for retirement to last 30 years, it is essential for retirees to address both increasing life expectancies and the long-term risk that inflation poses to purchasing power.
Insured alternatives are readily available, but many people still choose to self-insure on both counts by personally managing their nest egg throughout their retirement years.
Those using self-managed strategies often find themselves dealing with discomforting questions:
o Will my savings last the rest of my life?
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o Will my income keep pace with inflation?
o Will a market correction reduce the value of my nest egg, forcing me to live on less or risk running out of money?
Self-insurance involves risk that retirees may be unprepared to handle. People with retirement savings of $1 million or less may find it difficult to absorb significant bumps in the road. Even those with more resources may value the comfort that comes from insuring some of their income against longevity and inflation.
To transfer these risks to an insurance company, many financial advisors recommend annuities. However, to meet the changing needs of the 78 million baby boomers preparing for retirement, and to capitalize fully on this growth opportunity, industry leaders must re-engineer the traditional income annuity.
Why? Almost every U.S. life insurance company offers a traditional income annuity, also known as single premium immediate annuity (SPIA), and the vast majority are identical in design. Over the past few years, SPIA sales across the industry have been relatively modest.
So the question is: Why don’t more retirees use traditional income annuities to insure the risks associated with retirement income?
One important reason is the failure of SPIAs to keep pace with the complex needs of today’s retirees. It is hard to believe, but the typical SPIA has changed little in the past 50 years. Imagine the effect on permanent life sales if life insurance ceased to evolve beyond traditional whole life–no interest-sensitive life, no universal life, no variable universal life. It is difficult to find another insurance product where such is true, but that’s the case for the typical “Life with 10 Years Certain” SPIA.
The growing focus on retirement income security has raised awareness among insurers that it’s time to improve the SPIA product.