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The long tomorrow

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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?

The knee-jerk aversion to annuities by consumers is referred to by those in the industry as the annuity puzzle. Many industry watchers specialists have for many years come to the conclusion that the vast majority of Americans should annuitize a much larger portion of their accumulated assets than they do. Income annuities are a perfect mechanism to ward off longevity risk yet the general public (some contend due to a lack of understanding) have a strong distaste for them. Individuals see them as a gamble, a bet with insurance companies and they are not keen on purchasing nor having them pitched to them.

Peter Gourley, Vice President at Ruark Companies, an actuarial and consulting company based in Hartford, Conn., feels that it is not much of a puzzle at all. “I think that the annuity forms that are available, if you want the most bang for your buck, you have to give up control of your money and in particular, the highest income could get would be if you bought a life only annuity but the deal there is, if you die the day after you bought it, that’s it. You get nothing and your heirs get nothing and that is a big obstacle for people; the decision to give up that control.”

Another theory as why the annuity puzzle exists is that many people in the general public feel that annuities are simply too expensive. Some years ago, all annuities could be considered fairly expensive. And while that is not the case anymore, the general public just has not been able to shake the misconception. MassMutual’s Michalowski feels that the transactional manner in which annuities were pitched and sold to consumers over the years is having reverberations today that propel the annuity puzzle. “When people are given the context of what annuities can do for their individual goals and needs that can change the conversation. Once people understand the products they can see the tradeoffs and impacts and this is where we have found that indentifying the need that the annuity is going to help solve has really changed perceptions.”

Simbro of Northwestern Mutual feels that the annuity puzzle is rapidly being deconstructed “We’re seeing a flight to security and in fact, our clients have an acute awareness of the need to protect their retirement nest-eggs throughout retirement. That’s reflected in our double-digit sales of annuities.

Although there is a disconnect between how actuaries, industry professionals and the “average Joe” think about retirement, that does not mean that gap cannot be closed. Retirees want to have a leisurely retirement wherein they are able to enjoy the same lifestyle they had in years passed while leaving their children unburdened. Contemporary annuities, when combined with a comprehensive retirement package are able to do just that; stretch the wealth accumulated over one’s lifetime so as not to outlive one’s money even if living a longer-than-expected life.  Industry experts agree that there is a dearth of basic financial literacy among the general public that will undoubtedly exacerbate the effects of longevity risk over the years to come, most notably when the hordes of Baby Boomers retire. What is not totally agreed upon is what can and should be done to stop it.

The industry has been shouting about the devastating and impending effects of longevity risk for years with their voices reaching a shriek-like pitch as the first Baby Boomers begin to retire. For the most part, the warnings have not sunk into the minds of the general public. We are operating in a perpetual state of unpreparedness as four out of five American workers are saving less than 10 percent of their income for retirement, according to LIMRA. Maybe a strong public service campaign is needed, or maybe like our lessons gleaned from the credit crisis we need to feel the devastating effects of our current ways. Whatever it is, American’s need to understand the importance of not living longer than their money.