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Insurance for the Most Dangerous Decade of Retirement

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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.”

The other strategy, according to Stone, was for advisors to try to manage that risk themselves. “Advisors have elected for a long time to manage that risk and diversify the client’s accounts and essentially hope for the best,” he said. “We’ve see it’s really impossible if a client wants to retire at a certain age — you can’t ignore the market and the timing of that. There’s little an advisor can do to ultimately guarantee an outcome for the client if the markets are volatile when they want to retire.” Stone said Aria’s RetireOne solution lets near-retirees stay in the market with more protection against a drastic drop. “They want to stay invested in the markets — the markets have done really well. They want to continue to hopefully gain from the account appreciating, but they also can’t afford what happens if the market drops 20% or 30%.”

Clients can “lock in their retirement income” so that if the markets go down and stay down, “they keep that high-water mark, so they generate income all the way through retirement if they need it.”

The income guarantee with the insurance wrapper is also called a contingent deferred annuity, Stone said. The assets stay with the advisor and client. After the client has been in retirement for a few years and weathered any potential market storms, they can decide whether they want to keep the wrapper or take it off.

“The goal here is to get the client to be self-insured at an age where they feel they can have their assets last their entire life and then take it off and there’s no tax impact,” Stone said. For those clients who do encounter market downs that have a significant impact on their portfolio, they may want to keep the wrapper throughout their retirement.

“The hard part for a lot of consumers and advisors has been the moving of the assets to an insurance company and also the loss of upside potential,” he said. “Given a choice, they say, ‘OK, I’ll give up some upside, and I’ll have the insurance company manage the risk.’ We’re saying, ‘No, you can actually have the upside potential and guaranteed income.’”

The cost depends on the risk profile of the client, but Stone said it can be as low as 65 or 70 basis points.

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