Americans are bombarded with potential risks to their well being and, for the most part it sinks in. Smoking cigarettes has dropped to record-low levels, it is no longer considered trendy not to wear your seatbelt and exercising and striving to eat healthily has become a voguish staple of modern society.
There are however, myriad other risks to one’s welfare that are not being heard. Maybe the causes have not positioned themselves to get the proper celebrity endorsement or, maybe some are just too inconvenient to be taken as truth. Or, perhaps the risks and the perils that come along with them need a larger and louder bullhorn.
As the country slowly and doggedly crawls its way out of the mire of the 2008 recession, lessons have been learned. Americans, among other things gleaned, have changed the way that they deal with credit, leading one to conclude that, as a society, we can correct our deficiencies. Among the remnants of the recession, a low interest rate environment and the possibility of inflation, there lurks another threat to our convalescing economy: Longevity risk.
Most people do not consider living a long life a risk for which they need to meticulously prepare. However, as the nation shifted from defined benefit plans into defined contribution plans, the onus of maintaining ones financial health in retirement shifted on to the individual. Many people simply do not know the facts when it comes to how long they can expect to live and what they will need to remain comfortable.
According to the Society of Actuaries, couples at the age of 65 have a 50 percent chance of living to 92. In order to have enough resources to take care of one’s medical and recreational needs advanced preparation must take place.
David Simbro, Senior Vice President, Life and Annuity Products at Northwestern Mutual feels that longevity risk is an essential factor to consider when beginning retirement planning. Annuities are one of the most effective tools one can employ for creating income in retirement and are therefore one of the most useful tools that can be used to mitigate against longevity risk. Being able to create a lifetime stream of income is invaluable and it is something that not all retirement products can do effectively. The industry has begun to develop more exotic annuities that can behave in unorthodox ways and reap benefits for the annuitant that were unheard of years ago.
Single premium immediate annuities and variable annuities are not your only choice at this point as deferred income annuities, cleverly marketed by some carriers as longevity insurance are beginning to make a huge splash in the marketplace as the option to “buy now and receive benefits later” becomes more and more important to consumers.
Annuities can and should be utilized to protect the consumer against all aspects of longevity risk. Phil Michalowski, Vice President Annuity Product and Marketing at MassMutual, feels that the conversation that agents have with potential clients should be tailored to what they want to do in their retirement before a strategy and specific products are put in place. “When you bring up longevity risk with clients I think that folks get very fearful and they are not sure what to do. You need to provide the appropriate context… Retirement plans that work against longevity risk need to have three core components: growth, access and predictable income, you can even have a fourth component around protection. Individuals need to know that they need growth for fighting inflation, they need access for their ‘rainy day fund’ and they also need predictable income because they need to understand what their expenses are going to be over the long term. ”At that juncture in the planning, specific annuity products are recommended.
A paper presented at the World Pensions & Investments Forum in December of 2010 stated that many actuaries feel that after low interest rates and inflation, longevity risk is the biggest risk to the economy. With the Baby Boomer generation retiring in droves, many with their investments nearly decimated by the financial crisis, longevity risk has the capacity to wreak havoc on the country. The booming market of the 1980s when many of the oldest baby boomers began saving for their retirement is no more and many individuals, though still seeking high returns to make up for funds lost in the economic downturn, have begun to value to stability and security once again. So why is it that many consumers are so ardently opposed to annuities?