In the pre-retirement phase of life, conventional wisdom says that people should be saving to accumulate a nest egg that they can live off for the remainder of their lives.
But what happens at retirement? How does someone know if they have saved enough to retire? How can a person protect a nest egg from stock market erosion? What risks does a retiree take on when they start living off of their nest egg? How can someone "convert" an accumulated nest egg into guaranteed income?
Industry folks have been touting the emergence of the retirement income market for quite some time; in fact, annuity companies have responded with several products to capture the boomers' need for guaranteed retirement income. Even the earliest versions of annuities provided for lifetime income in the form of annuitization, and immediate annuities have been around for a long time.
Yet immediate annuities and annuitization are not popular options for lifetime income today. For a myriad of reasons, these products and their features and benefits do not resonate with customers and reps. Just a fraction of today's annuity buyers ever annuitize, and the single premium immediate annuity market has been relatively flat for a number of years.
Annuities offering guaranteed minimum withdrawal benefits and guaranteed minimum income benefits have proven to be popular choices in recent years, but it is still too early to assess the effectiveness of the income options on these types of products. At best, GMWBs and GMIBs are viewed as safety "floors" in the event the equity markets head south and clients' contract values seriously erode.
Anyone who has studied the baby boomer market knows that there is a confluence of issues that has created a huge need for guaranteed income.
Defined benefit pensions have been on the decline for a number of years, and companies now rarely offer them or they are closed out to new employees. Defined contribution products such as 401(k) plans have increased in popularity, yet many people do not take advantage of them, and people who do know all too well what volatile markets can do to account balances. And while Social Security provides some form of retirement income, it is rarely enough to cover retiree needs, and the age when a person becomes eligible continues to go higher.
All these factors point to the huge need for individuals to save for their retirement, and when retirement comes, these people need guaranteed lifetime income.
This is a significant need, so why does there appear to be a disconnect in the market? What can life insurers and distributors do to capitalize on this growing need to convert assets to income?
Fortunately, there appears to be a growing trend toward financial and retirement income planning. More and more advisors are turning towards income planning as a large part of their practice. Consumers are also becoming increasingly aware of the need for guaranteed income, and the risks they assume by withdrawing from their savings, and the likelihood of running out of money.
As this trend continues, the big retirement question of "how much money do I need to accumulate" will become "how much income will I need in retirement and how do I generate that?"
Financial advisors have a large opportunity in front of them. Many widely published studies show that advisors who begin to talk to clients about guaranteed income and make that a part of their retirement planning practice have a greater chance of consolidating a larger portion of their clients' assets. And with all the uncertainty in the economy these days, clients are more receptive to this type of conversation as well.
Insurance companies, for their part, have a large opportunity too. Perhaps they can begin to design product solutions that address clients' and reps' objections to current income product offerings.
One obstacle is that the decision to annuitize is often irrevocable; clients need flexibility as life circumstances change. Second, income solutions need to adjust for inflation, and need to provide upside potential should capital markets perform well.
These are just a couple of ideas that can spark product innovation to fill the gap for lifetime income solutions.
Mary M. Fay is executive vice president of Actuarial Strategies, Inc., Bloomfield, Conn. Her e-mail address is maryf@actstrat.com.
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