The perils of asset-linked retirement securityArticle added by Joe Bellersen on August 26, 2010
Joseph Bellersen

Joe Bellersen

Joined: August 21, 2010

As retirement nears, many retirees are pressed to accept asset growth as the only solution. Advisors defend “asset-linked retirement” by arguing that retirement is a long-term proposition. What advisors fail to accept is that asset growth is very volatile and creates greater risk of spending down assets for income needs in down markets. Few advisors advocate spending down through an immediate annuity discipline. Why? In most instances, fees will then cease.


The ideal proxy for determining a secure retirement is defined as “assets at interest.” In prior articles, we have referred to this as the endowment theory. There is another dynamic way of viewing retirement security: asset-linked retirement.

What’s the basis for an asset-linked retirement?

Quite simply, most advisors recommend that clients accumulate, retain and minimize distributions of assets over time. The issue is very simple: Not everyone has the same amount of time — or assets. In fact, many risk running out of assets altogether. And that fear can only be satisfied in one of two ways: either an asset-linked endowment or a SPIA.

What’s the alternative? “Go back to work,” is an answer too often mentioned. I don’t like it — nor do I like, “Cut back on spending.” That’s not what most would consider a secure retirement.

In simple terms, an asset-linked endowment model thrives on interest alone on a given sum of money. The premise is clear: Build your assets so that you can cash interest coupons forever and never touch principal. Obtaining the necessary amount of capital needed for a secure
retirement is not always easy. Gathering that basket of assets during a working lifetime is a challenge if you delay the project.

An asset-linked retirement relies on consumption of principal during retirement. The theory, again, is quite simple: If you do not have enough to provide a secure retirement, clip coupons, then take more risk in a diversified pool of assets in the hope that it will propel you throughout your retirement — all things being equal at all times of course. So a simple question is posed: Is an asset-linked retirement secure?

At times you can get most everyone to agree on this. However, in September of 2001 it would have probably been more difficult to get the same response. Equity asset values plummeted and margin calls were invoked. Now, the new bubble relating to an asset-linked retirement is the housing market. In order to understand the potential impact, ask yourself, is a home considered an asset-linked retirement asset? You bet it is!

Do you believe that reverse mortgages are going to be more freely available in a falling housing market? The reverse mortgage market may evaporate for a while. Why? A reverse mortgage is basically a way to “short” the asset value of a home. Those who shorted the housing market already are fine — so long as the payer does not default.

Property value is an issue relating to the reverse mortgage market which is yet to impact retirement thinking. Risks loom for a secure retirement. Its simple: Things can, and do, go wrong; the problem is some things go wrong at the wrong time.

The subprime bubble

Former Federal Reserve Chairman Alan Greenspan has said some very sobering things1:
  • “A big overhang of property will bring U.S. house prices down further, but it is too early to say if the economy will plunge into recession.”

  • “Low interest rates...were to blame for the house price bubble, but that central banks were powerless when they tried to bring it under control.”

  • “...there is an enormous overhang on the real estate market.”

  • “Prices are going to fall much lower yet.”
Any asset-linked retirement has risks. The home is rarely deemed to be at risk. A SPIA also has the inherent risk of a loss of principal on early death. However, a SPIA can be hedged with a refund feature. It also serves as insurance by paying an embedded “tail coverage” provision if you outlive life expectancy from the date of purchase. So, admittedly, a SPIA is also an asset-linked retirement product that has risks. Yet, it has many operating components that, when taken together, are exactly what retirees seek for a secure retirement.

SPIA as a rational retirement income proxy

Many retirees can grasp the context of an affordable retirement plan. Their nest egg, or a portion of it, can be used by designing a SPIA that insures a secure retirement income. The operative word here, needless-to-say, is
secure. Quite simply, a SPIA with an inflation hedge is a great proxy for understanding the degree of a secure retirement. Such a proxy may also encompass a legacy bequest if a refund feature is included.

Therefore, we provide a simple table at various ages to develop that retirement security proxy:

Bellersen's Secure Income Power Index™
Bellersen's Secure Income Power Index™
SPIA with
certain +
3.00% annual
* This is not a tax adjusted yield.

** This is a tax adjusted yield, which, when measured against equity returns, implies a substantial degree of risk be taken in order to equal such a return, thus developing a compelling SPIA proposition when based upon risk.

If one balances their nest egg with a properly designed SPIA, then a systematic discipline is in place for life. A refund is available for legacy purposes. Age plays a crucial factor — the proposition becomes more compelling as life expectancy declines. When pure cash flow is compared to an equivalent equity return, substantial risks need to be taken in a market basket of securities to equal that return. When tax effects are considered, even more risk must be taken in order to achieve the efficiencies of a SPIA. Plan wisely — the risk of a secure retirement diminishes with each passing year.

Reverse mortgages

For many retirees, the thought of utilizing a reverse mortgage to finance into retirement may be fleeting as home values decline. Subprime problems may diminish the availability of reverse mortgages. This potential source of asset-linked retirement might spiral downward as prices decline further.

What’s the point?

Retirement security is linked to asset values — in fact, almost linked too much. It is crucial to understand that a retirement security plan linked to asset values is risky business. Strike a balance by thinking about creating secure cash flows — SPIA products are an ideal solution.

What have we learned?

Retirement income needs contradict asset accumulation plans. If security is desired in retirement, a good measure is the SPIA as a proxy. In fact, the SPIA may also provide a solution to a balanced approach.

SPIAs deliver compelling returns with potentially minimal risk. A SPIA is the threshold of a retirement security plan. When the aggregate components are packaged correctly, security is affordable. The alternative? Take lots of risk.

Secure lifetime income is a planning opportunity for professionals. SPIAs are not perfect. Risks abound; however, solutions are available now to secure income for many.

Rate commentary:

Spread Analyzer results for
The Bellersen TEq Yield Power IndexJ
illustrate SPIA cash flows on a Ataxable equivalent yield at basis. This is a clear picture of SPIA yield power.

The Bellersen TEq Yield Power IndexJ
MaleAugustSeptemberChangeT BondTSpread
6510.83%10.91%+.08%4.83%+ 6.09%
7012.77%12.69%-.08%4.83%+ 7.86%
** Yahoo! Finance — Bonds B Sept, 2007

1 Source: Yahoo!Finance - Reuters “House Prices to Drop Much Lower: Greenspan” - September 21, 2007

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