More than half of investors in this country are worried they will outlive their savings in retirement, according to a 2013 Gallup poll. And only 13 percent of American workers are very confident that they will have enough money for a comfortable retirement according to the latest report from the Employee Benefit Research Institute.
These fears are exacerbated by the fact that Americans are living longer. Today a person reaching age 65 can expect to live, on average, another 20 years, according to the Social Security Administration. Roughly one out of every four 65-year-olds today will live past age 90 and one out of 10 will live past age 95. And the number of Americans age 100 or older has increased almost 66 percent over the past 20 years, according to Census Bureau data, growing at twice the rate of the population overall.
And to make matters worse, there are increasing concerns that Social Security benefits will not be sufficient to fund future retirees’ expenses. Today, Americans who have reached the full retirement age of 66 currently receive a maximum payout of $2,642 per month. Those willing to postpone withdrawals until age 70 currently receive a maximum payout of $3,425 per month. But Social Security’s 2013 Trust Fund Report projects that the combined retirement and disability fund will be exhausted in 20 years. If Congress doesn’t agree on a plan of action to close the funding gap, benefits would need to be reduced.
Advisors acknowledge their clients’ concerns—and recognize the additional complexities. According to Jefferson National’s Retirement Income Solutions survey, more than two-thirds (71 percent) of advisors say the biggest challenge to generating sufficient retirement income for their clients is caused by a combination of three key factors: 1) a low yield environment, 2) maintaining adequate equity exposure and 3) managing volatility. This triple threat demands a new approach to the retirement income challenge.
Guarantees: The changing landscape
The landscape for guaranteed income products has evolved significantly. Variable annuities (VAs) were introduced in the mid-50s. Four decades later, VA premiums reached more than $70 billion per year, according to the Committee of Annuity Insurers. As the market boomed and returns consistently hit double digits, the VA industry thrived.
By the late 90’s products evolved to include an expanding range of enriched insurance benefits and income guarantees. Their appeal to investors was tremendous, a combination of downside protection, upside potential and guaranteed income stream in one product. And by 2000, VAs had become a trillion dollar industry.
But since the crash of 2008, historic low yields and ongoing market volatility have made it increasingly challenging for insurers to manage the risk on their balance sheet, making guarantees more costly to provide. In recent years, many companies have been forced to cut benefits, raise fees, restrict allocations, re-tool products and renegotiate guarantees. Others have been forced to retreat from the industry altogether. Still, 51 percent of advisors surveyed say variable annuities with income guarantees continue to be the most popular products to generate retirement income. Yet, close to 70 percent of these advisors and their clients who use VAs cite rising fees and declining benefits as a cause for dissatisfaction. The demand for a new approach has increased.
Investment-only VAs: The next generation