Volumes have been written about the accumulation of retirement income funds. Many Americans track the status of the stock market, their pensions and their 401(k)s with the same fervor as they do their favorite sports team. What often receives less attention, however, is how they plan on managing their money after they retire – the decumulation phase.
While accumulation is not easy, it benefits from having a fixed planning horizon; most people know when they will retire and how much they want to have saved. Decumulation can be trickier because no one can realistically predict how long they will live after retirement and how much of their nest egg they can spend each year for retirement income.
The Single-Tool Solution
Four of the key challenges that today's clients will face when planning their retirement income are potential market losses, increased longevity, inflation and greater personal responsibility. You can help clients overcome each of these challenges with one simple tool: income annuities.
With income annuities, purchasers exchange a portion of their savings — usually enough to provide a "floor" of income — for a regular, guaranteed paycheck that combines the principal they paid and an anticipated rate of return. Payments can begin immediately or at a set date in the future. And they can last for a predetermined period or for life.
Let's look at how fixed income annuities work to counter these four challenges and help clients spend their retirement savings with less worry that they will outlive it.
Challenge #1: Market Losses
As seen in recent years, market risk is the most visible, and potentially most damaging, challenge many retirees will face. Traditional pensions once provided Americans with stable, reliable income in retirement by taking market risk out of the equation.
Today, fewer companies offer pensions and more employees are placing their financial fate in the hands of the market through 401(k)s and IRAs. Given the recent fluctuations of the market, nostalgia for the "good old pension" is widespread.
Income annuities take market risk off the table by helping retirees, in effect, build their own pensions. Retirees receive a guaranteed, predictable payment whether the market is up or down. And their income will not be reduced or wiped out by market losses. Clients who get anxious watching their portfolios rise and fall with the market may find the simple stability of a regular income annuity payment to be a great stress-reliever.
Challenge #2: Longer Lives
Another problem: Americans are living longer and retiring younger. In 1910, the average life expectancy was 50. Among those who retired from a job, the average retirement age was 74. Today, most Americans collect their last paycheck at age 62. Even as we retire younger and younger, our life expectancies have reached an all-time high of 77.8 years. All of this means that nest eggs need to last longer than ever.
With guaranteed lifetime payment options, income annuities can provide the peace of mind that, no matter how long they live, clients always will receive a regular payment. Another option, a deferred income annuity, allows clients to purchase their annuity at today's lower costs, but set their payments to begin later in retirement. This lets clients enjoy their earlier, more active retirement years, knowing that a guaranteed and predetermined income stream will begin in the future.
