The period immediately before and after retirement can be precarious for new retirees, as market movements can have an outsized effect on their retirement income. It’s why guaranteed minimum income products have taken off, with consumers willing to forgo returns in favor of a predictable stream of income.
In the “five to 10 years before and after retirement, sequence of return risk is by far the biggest concern most retirees have,” according to David Stone, CEO of Aria Retirement Solutions. If nothing significant happens in the market in that “fragile decade,” their money can last 25 or 30 years, if not more. However, Stone said, “if they time it wrong, then bad things happen and in 10, 15 years, they’re running out of money.”
His company offers advisors a way to wrap an income guarantee around their clients’ portfolios in order to protect against sequence of return risk.
“What we really want to get people familiar with is the idea of insuring that risk period: get out of that period with their portfolio and their income stream in good shape, and decide themselves if they want to move forward without a guaranteed income solution,” Stone said.
One way advisors have helped clients manage that risk is through annuities.
“When we entered the market place, there were two ways to do it,” Stone said. “One was to offload the risk to an insurance company through annuities, a variable annuity or an immediate annuity. Then the insurance company manages that risk, and the markets can go up and down but it doesn’t matter because the insurance company will guarantee their money or income until they die.”
The problem with a more traditional annuity, Stone said, is that clients can end up paying for something after they stop needing it. “You’re locked into because of the tax angle of the annuity, tax deferral and penalties and so forth. You survived the fragile decade but you still have this long-term investment. You’re paying your fees and you’re paying for this guarantee and you probably don’t need it after a certain point.”