By Cyril Tuohy
The explosion of retirees will expand the retirement product line-up and add features to individual retirement offerings for the foreseeable future.
More choices are likely to spur a greater need for advice, particularly in the decumulation phase, as retirees draw on income to pay for fixed costs, according to retirement experts. Advisors can look forward to new products that manage the drawdown.
Low-cost and low-risk products, along with fixed and deferred annuities, are often cited as the most important ways for retirees to pay for life’s necessities, including health care.
Those basic needs rely on guaranteed sources of income, which annuities are designed to create. The annuities marketplace is less attractive than it used to be because of low interest rates. Yet it isn’t standing pat.
For example, guaranteed lifetime withdrawal benefit (GLWB) riders, often seen as an essential feature, will be joined by hybrid or combo annuities that include long-term care or chronic-care benefits, according to annuities experts.
Return-of-premium features, also known as principal preservation income riders, are becoming more popular, according to recent reports. The more “dimension” to an annuity, the more likely it will meet the burgeoning need for income.
Annuities can go only so far. The industry must look toward hybrid portfolios that invest in annuities side by side with a “drawdown facility,” according to a study on retirement released in October by London-based CREATE-Research and sponsored by The Principal Financial Group and Principal Global Investors.
With interest rates expected to remain low “for the foreseeable future,” annuities are losing their shine, write the authors of the report, “A 360-Approach to Preparing for Retirement.”
No matter how much sales and marketing pitches gussy up annuities with living benefits and income riders, the search for higher yield is likely to intensify, particularly with the eye-popping performance of the stock market.
So-called “managed drawdown” accounts come in two forms. One form pays the policyholder an amount of principal ranging from 3 percent to 7 percent annually. The higher the percentage, the greater the risk in the portfolio.
The second form aims to deplete the principal over a fixed term – 10 years to 30 years, typically. “While both forms enable a retiree to turn residual savings into bequests, neither provides any guarantees,” the report said.
“To partly compensate for that, the current innovation effort is centered on products that deliver regular income, inflation protection and low volatility within a single package,” the report said.
But generating enough income means investing in high-yield bonds, global value securities and real estate securities, preferred securities, emerging market debt, commercial mortgage-backed debt, and even call options, the report said.
In a separate interview with InsuranceNewsNet on the topic of alternative investment strategies, Steve Young, chief investment officer and senior vice president of the asset management group for Curian Capital, said alternative strategies to complement bond portfolios are necessary if investors are going to earn higher yields than they can get in the money market or in bank certificates of deposit.
The idea with more product diversity is to manage the volatility and the drawdown to lower the “sequence of returns risk,” or the year-to-year volatility of the portfolio, because retirees have little or no time to make up for an outsized loss.
With interest rates so low, still more product diversity in the decumulation phase is expected as retirees accept lump sums from their defined benefit plans as companies move away from the defined benefit model toward the defined contribution (DC) model, according to the Principal report.
The trend to accept lump sums “may likely spread to the DC space, too, driven by three imperatives: cost of annuities, bequest aspiration and health care needs,” the report also said. That will lead income-oriented products to coexist with annuities in the decumulation market.
Interest rates are low because the Federal Reserve has been buying $85 billion a month in Treasury bonds to help spur the economy. An improving economy would cause the Fed to taper its bond purchasing program. Less demand for bonds would cause interest rates to rise, which benefits fixed-income retirees who depend on products like annuities for income.
Cyril Tuohy is a writer based in Pennsylvania. He has covered the financial services industry for more than 15 years. He can be reached at [email protected].
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