America's new retirement: Risk traded for guarantees

A new research paper that finds Americans’ retirement plans are a lot more “guarantee”-focused and a lot less risk- and rate of return-focused.

The Allianz Life white paper, “Rethinking What’s Ahead in Retirement” identifies three post-WWII waves of retirement thinking. In the first wave, baby boomers’ parents focused on financial safety, keeping most assets with banks and life insurers. In the second, boomers centered on rate of return and asset mix. In today’s wave, market risk concerns have led to an increased demand for guaranteed lifetime income in retirement planning.

Allianz Life CEO Gary C. Bhojwani, who wrote the paper, calls the new paradigm a “three-legged stool” of retirement funding–and says it’s not stable. “Two of the three legs are shaky, which means personal assets are taking a bigger role to keep the stool upright. Boomers now know they may outlive their assets and thus must learn how to convert those assets into guaranteed retirement income.”

And even with a solid nest egg at retirement, Bhojwani’s research shows that retirees could still face gaps of up to 13 years, depending on the timing of the initial withdrawals and how the market performs during those years.

“While it is hard enough to accurately project an average annual return over an extended period of time, it is essentially impossible to project specific returns each year and determine how they will affect a distribution strategy in retirement,” Bhojwani writes.

The paper suggests that through annuities, insurers are in a unique position to guarantee a stream of income that can last throughout retirement.