Why the battle for retirement income hearts is no contest
By Brantley Whitley
The Insurance Pro blog
These are two distinct problems that retirees face. Life insurers and their products win both battles, hands down. Make no mistake though, the mutual fund industry, investment managers and big wirehouses are all gunning for the chance to win this fight.
None of us has been prepared for the growing demand that is now upon us to help our clients distribute their accumulated wealth in the best way during their retirement. Honestly, I think this is one of the biggest boondoggles for financial advisors, investment companies and life insurance companies to date.
For years, nobody talked about it … at all. The industry was laser focused on gathering assets and helping folks accumulate wealth with the all the hype surround the best rate of return. When you look at the issue of retirement income distribution, there are actually a couple of broad issues at play here:
- Help clients determine their longevity risk — how long will the money last?
- Assist them in the distribution of their assets in the most tax-efficient way possible — which pile do I draw from first?
The data that has been released from the study is fascinating, and I’ll admit that I was a bit surprised by some of the numbers. It concludes that almost half (46 percent to be exact) of all defined contribution assets (think 401(k), 403(b) etc.) are currently held inside of individual annuity and group annuity contracts. With the dominance and pervasiveness of the mutual fund industry in the last couple of decades, I didn’t expect that high of a percentage of defined contribution assets to be held in annuities. Now, while all that information is fascinating, it’s just the beginning of the story in my opinion. What does it all really mean?
Well, for starters, it means that life insurance companies, agents and brokers have a tremendous opportunity in front of them. We have a chance to help our clients turn those buckets of money into the income they’ll need when they punch the clock for the last time before strolling off into the sunset. Certainly I’m biased here, but the insurance industry clearly has the advantage in this war for managing retirement income streams of our baby boomer clients.
These are two distinct problems that retirees face. Life insurers and their products win both battles, hands down. Make no mistake though, the mutual fund industry, investment managers and big wirehouses are all gunning for the chance to win this fight. They won’t stand idly by and back down from a good brawl. We’re talking about trillions of dollars at stake here. Why do insurance companies win the retirement income fight?
Life insurance companies can win this fight, if we spend the time to educate people properly. How? 1. We have access to solutions that will guarantee lifetime income. Remember, retirement assets are all about generating income. Don’t be swayed by the advisors and agents out there whining about the fact that annuity yields are too low. Hogwash and poppycock. Yes, the interest rates and cap rates are low, but our focus should be all about income. If you haven’t ever studied data concerning the effects of market volatility on retirement income, keep reading. It can absolutely devastate an otherwise happy retirement.
2. The sequence of returns matters. I’m going to give you a couple of visual aids to help illustrate my point here. First, take a look at this chart that displays the sequence of returns year by year of the S&P 500 from 1989-2008. Notice that the average annual rate of return doesn’t change.
Simple math, right? If you were purely in the accumulation stage of your life, it would be no big deal in what order the returns come; you’re not drawing any money out of market. But consider the reverse scenario. If you’d retired in 2008, you would have been down 37 percent and you would have had an additional three years of losses within your first 10 years of retirement. See what happens to your income generating assets when this happens. Consider this chart that shows a hypothetical $1,000,000 investment with $50,000 annual withdrawals. This is in line with a 5 percent withdrawal rate that many financial experts deem appropriate.
In both scenarios, the withdrawal was $50,000 per year and increased 3 percent each year to keep pace with inflation. As you can see, sequence is everything. So, now I’ve gotta ask: Do you know what the sequence of returns will be in the future? Yeah, I don’t either.
If I could do things like that I’d charging big money for my predictions!
The battle for who wins the retirement income hearts of America is far from over. However, as far as I’m concerned, there’s no contest. Using fixed insurance vehicles can insure that scenarios like the one displayed in the charts above never happen to our clients or our loved ones. Any decent fixed index annuity with a good guaranteed lifetime withdrawal benefit (GLWB) can provide similar if not superior income and with a guarantee that your client will never outlive it, in spite of market volatility or artificially low interest rate environment like we have today.