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Millions of Americans face an uncertain future with the risk of outliving assets in retirement.
By Cyril Tuohy
The retirement habits of the American worker have come under scrutiny over the past few years, and much of the news isn’t good. Americans save too little, their retirements are underfunded and their perception of risk appears deeply skewed.
Before talking about how to solve the coming hardships, however, advisors should be aware of statistics that put risk in perspective, and highlight how misplaced many peoples’ fears actually are. After all, it is National Retirement Planning Week, April 7 to 11, so there’s no better time to talk about misplaced fear.
The odds of suffering from a snake bite are 1 in 50 million per year, from a spider bite 1 in 51 million per year, from a shark attack 1 in 315 million per year, from a dog attack 1 in 9.53 million per year, and from swine flu, 1 in 383,758 per year.
Before going out and buying shark repellant or face masks, consider these other statistics, and some of the odds they represent.
More than four in 10 Americans are 90 days away from poverty, nearly one in six (15 percent) lives below the poverty line, most Americans have less than $25,000 in retirement savings, 68 percent of Americans live paycheck to paycheck, 48 percent of Americans don’t contribute to their retirement plans.
The statistics, made available by the Guardian Life, help paint a picture of risk and its proportions for advisors.
Statisticians often point out the absurdity of these fears. Every day, advisors run into clients frightened about the wrong things. The skewed perception of risk proportionality would even be funny if it weren’t so serious.
Douglas Dubitsky, vice president of product management for Guardian Retirement Solutions, calls longevity – outliving assets in retirement – one of the greatest risks facing the U.S. today. The “multiplier effect” of longevity risk has the potential to amplify every risk faced in retirement: inflation, health care costs and market returns.
“All of them are multiplied by longevity,” he said in an interview with InsuranceNewsNet. ”Everybody is going to die but nobody knows when.”
The longevity discussion is different from the “life events” that often dominate product-centered chatter between financial advisors and their clients. Longevity risk isn’t about birth, marriage or death. It’s less concrete – and more open-ended.
Partly as a result, advisors have difficulty starting the conversation around longevity, Dubitsky said. Other times, the conversation bogs down in clients obsessed with rates of return and how insurance products compare with mutual funds, for example.
“Longevity is something reps don’t talk enough about,” Dubitsky said.
Millions of Americans will live longer than they ever planned. Already, there are more than 53,000 centenarians alive in the U.S. today, according to the Guardian figures.
People should be scared, but not about spider bites. They should be scared about outliving their assets, he said.
So where do advisors go to allay fears? Turn off the financial cable news channels and look to annuities, he said.
They are the financial products that take “fear off the table,” he said, as annuities are the only product that guarantees income that outlives the life of the annuitant, whether the annuitant receives $500 a month or $5,000 a month.
Some advisors stay away from annuities. They think they can do better either through mutual funds or other investments.
Perhaps, but that doesn’t remove the fear factor for their clients. Advisors who structure annuities to cover expenses in retirement, and then invest what’s left, are those who’ve taken risk off the table, he said.
Critics of the annuity industry have pointed to their complexity and their high fees as a reason not to invest in them, but Dubitsky disagrees. Some parts of the annuity industry are more complicated than they need to be, yes, but annuities run the gamut from the simple to the complex.
Single premium immediate annuities (SPIAs) are as simple to understand as a certificate of deposit held in a bank. Variable annuities (VAs) with dozens of choices in which to invest premiums are as complex as hedges and options.
“My reps’ biggest fear is fear of the client, the clients don’t want to sign the application,” Dubitsky added. “There’s always something and there’s always something on cable news saying it’s the wrong time to invest. So clients are terrified.”
If Dubitsky sounds like a fan of annuities, he is. He has seen them evolve over many years and he isn’t shy about singing their praises, particularly as they’ve become more flexible.
Annuities used to be rigid. They used to solve a problem, so long as the problem took on a certain profile and was limited to narrow parameters. With more options and customization, however, annuities are more likely to fit a broader range of challenges.
“We’ve done a much better job in past few years about the complexity part,” he said. Advisors have more latitude to use annuities as clients need them.
Cyril Tuohy is a writer based in Pennsylvania. He has covered the financial services industry for more than 15 years. Cyril may be reached at firstname.lastname@example.org.
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