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A confusing tangle of paths

Retirement Planning > Spending in Retirement > Income Planning

Trendspotter: Demand for Guaranteed Retirement Income Is Surging

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What You Need to Know

  • As bond yields have remained low, retirees and advisors are increasingly seeking out income sources more reliable than stock returns.
  • Social Security, pensions, annuities and even reverse mortgages can provide income for life.
  • Relying on total return isn't the best, choice, retirement experts state.

A recent survey found that 78% of advisors reported that predictable income is more important to clients than asset growth. Although the study is from DPL, an annuity platform, the company isn’t alone in seeing a rise in the pursuit for guaranteed income as bond yields have dropped.

As DPL’s CEO, David Lau, told ThinkAdvisor in September, advisors have increasingly excluded bonds from total assets as part of their 1% fee because bonds aren’t yielding that much return.

Further, BlackRock, the largest asset manager in the world, recently announced it was adding annuity options with its new target date retirement product for 401(k) plans that will provide workers a stream of payments through their lives.

Reliable, predictable or guaranteed income can include:

  • Social Security: Although “guarantee” is relative, depending on Congress’ ability to finance this in the future, a majority of Americans rely on this income for retirement. However, one guarantee is that each year a person doesn’t tap into Social Security after full retirement age, the amount of their benefit increases 8% until age 70.
  • Pensions: A dying breed of savings, as the Labor Department found that the number of pension plans offered by companies plummeted by about 73% from 1986 to 2016, although many retiring boomers have these savings programs.
  • Annuities: DPL’s survey found that 38% of advisors allocated some of a client’s portfolio to an annuity, up from 29% the prior year.
  • Life insurance: Payment typically is in a lump sum.
  • Home equity/Reverse mortgages: Not guaranteed income for life, but as an individual remains in the home and continues with upkeep, they can live there for life.

Here are some thoughts from retirement experts on potential paths to retirement income:

Steve Vernon, a research scholar from the Stanford Center on Longevity, in his book “Retirement Game-Changers,” states that four key “paychecks” individuals can set up to guarantee funding for life are 1) Social Security benefits, 2) an employer pension plan, 3) a low-cost payout annuity and 4) a monthly tenure payment from a reverse mortgage on one’s home.

“In addition to lasting the rest of your life,” he states, “another nice thing about these four retirement paycheck sources is that they’re very user-friendly and worry-free. The checks for each of them come automatically in the mail or are deposited electronically. You won’t need to make decisions about investing your savings or calculating withdrawal amounts.”

David Blanchett, head of retirement research at QMA, told ThinkAdvisor that the “guarantee doesn’t necessarily need to be for life. For example, if you bought an annuity that paid out over a fixed period, that would be guaranteed income. … I’m not sure it necessarily includes life insurance, because [that] is more of an income replacement vehicle (where you get a lump sum) verses some type of regular ongoing income.

“Given today’s low interest rate environment and the unique payout structure of Social Security retirement benefits, that’s generally going to be the first place retirees should look for guaranteed income. Beyond, there does appear to be greater interest among advisors given the rise of fee-only/fee-friendly annuities and the growing interest among plan sponsors after the passing of the SECURE Act.”

Wade Pfau, professor of retirement income at The American College of Financial Services, prefers to use the term “reliable income,” and says there are basic strategies retirees can use to fund expenses, depending on which retirement style “resonates” with them, he told ThinkAdvisor.

These styles include “total return,” for people think who don’t think they need guaranteed income because they can rely on market growth as a way to source essential spending.

“Then there’s time segmentation, where they’re just using bonds, [which] works best if holding individual bonds to maturity to cover upcoming expenses,” he says. “And then the two strategies where, more like an annuity or even life insurance, can play a role in protected income.”

Finally, there is a risk wrap, which includes deferred annuities with living benefits as well as other income from Social Security, pensions and other sources.

He adds that when people think reliable income, they might think of a 60/40 portfolio “as historically it’s done a pretty good job of doing that, but with interest rates so low, there are risks associated with it, and that’s where there might be a disconnect. …

“We’re finding that somewhere around a third of people have that total return mindset, which would allow them to think of an investment portfolio as providing predictable income, but around two-thirds of the population isn’t really thinking that way.”

He notes that “it’s conventional wisdom to avoid annuities when interest rates are low, but the reality is the opposite. Whether or not this is a short-term trend, it’s hard to say. It is irreversible that finally people are starting to understand retirement risks better. [Also] there’s longevity — you don’t know how long the money needs to last. And then the sequence of returns risk on top of that, where market volatility has a bigger impact.”

As to annuities, he notes that registered index-linked annuities are seeing big growth now.

“It’s an updated version of a fixed annuity, but because interest rates are low, fixed indexed annuities can’t really provide much upside potential,” he says. “RILAs can have losses, but it limits in some ways how much loss you can have.”


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