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October 17, 2011 at 09:11 AM
“Diversification is not only the first important thing investors should think about, but the second and the third, and probably the fourth and fifth, too.”
-John C. Bogle, founder of the Vanguard Group, as quoted in the Wall Street Journal, Sept. 10, 2011
In today’s fast-changing global economy, investors need to view diversification through a wider lens. As mentioned above, thinking about diversification for the fourth or fifth time could entail going beyond just spreading growth potential and risk across different markets and asset classes.
Investors now need to take into account how the new normal of continuing market volatility and prolonged low interest rates can erode assets over time. Along with stocks and bonds allocations, retirement income planning tools may also need to be diversified.
Let’s take a quick look in the retirement income planning toolbox. One likely missing item is a traditional defined benefit (DB) pension. The extinction of the DB plan has been well documented. According to the Employee Benefit Research Institute, only 3 percent of private sector employees are solely covered by a defined benefit pension plan, down from 28percent in 1979. Today, in many debt-burdened states, even public employee pensions are now under attack.
Another old tool, Social Security, may not be as dependable as many workers had hoped. Experts continue to debate the sustainability of the Social Security system to pay future retirees benefits. Funding the system may require significant changes in participant behavior, such as working longer or delaying Social Security benefits.
With these predictable pension tools either gone or now in question, the pressure is on individual Americans to take personal responsibility for their individual retirement planning. That puts pressure on their advisors to help them diversify their retirement income sources against new normal risks.
Luckily both old and new tools are available to help. Variable annuities with optional living benefit riders have long been and remain effective tools for helping to create and protect a guaranteed retirement income stream, regardless of market performance. Since the market crash of 2008 and the subsequent waves of volatility, these products have gained wider acceptance among advisors. Former skeptics now may value the predictable level of retirement income variable annuities can help provide their clients, even in down markets.
