Maybe Guaranteed Access to Money Can Buy Some Happiness: Idea File

Sri Reddy is one of the executives who’s helping U.S. life insurers promote the idea that retirement income guarantees matter.

Reddy is a senior vice president in retirement and income solutions at Principal. He’s in charge of the company’s retail annuity and pension risk transfer operations.

He has helped lead the effort to promote a white paper, developed by Michael Finke and Wade Pfau, that supports the position that combining a stream of guaranteed income, from an annuity or similar product, with cash from a diverse non-guaranteed portfolio sharply increases the probability of an individual still having an income at age 95.

(Related: Personal Financial Satisfaction Dips Due to Market Volatility: AICPA)

Finke and Pfau concluded that, in the scenarios they analyzed, a combined approach would increase the likelihood of an individual still having retirement income at age 95 to 77%, from 60% with an investments-only approach.

Principal sells ordinary mutual funds as well as annuities.

But Reddy said he thinks a combination approach is better for many retirement savers.

“There is a correlation between having higher levels of guaranteed income and happiness,” Reddy said.

Here are three more things Reddy said about retirement income.

1. Inertia matters.

Reddy said he thinks some advisors still recommend 4% to 5% annual portfolio withdrawals for most out of habit.

“Advisors tend to specialize and stick to the approach they’re comfortable with,” Reddy said. “But there’s always going to be those tail risks…”

2. Life insurance company guarantees are solid.

One concern about life insurers’ guarantees is the reality that the guarantees are only as strong as the insurer.

Reddy said the record of companies like Principal speaks for itself.

“Every month, we cut over 300,000 checks,” Reddy said.

3. Administering annuities has value.

Principal absorbs blocks of pension business from other companies, and it also administers its own annuities.

Reddy said he thinks handling administration in-house is a source of strength.

“I think that gives you a better understanding of true mortality and longevity,” Reddy said.

Resources

A copy of the Finke and Pfau

— Read 4 Secrets to a Happy Retirement From the 80-Something Crowd, on ThinkAdvisor.

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