Annuities Shine Amid Retirement Planning Struggles

ORLANDO -- For many Americans, retirement will be expensive due to a perfect storm of sorts.

Those storm clouds include historically low returns on assets combined with increased longevity that sees some Americans living 30 years or more in retirement.

“If you’re a lower-income, lower-earning worker, then Social Security is going to make up a pretty good part of your income,” said Michael Finke, dean and chief academic officer at The American College. “But if you’re an upper-middle-class or higher-earning worker, you’re going to have to save even more.”

Finke will talk today at the final session of the LIMRA Retirement Conference.

He co-authored a recent Journal of Financial Planning report on retirement hurdles with David Blanchett, head of retirement research at Morningstar Investment Management,  and Wade Pfau, professor of retirement income at The American College.

“We estimate that it costs twice as much to buy $1 of real, after-inflation income … as in 1982,” Finke said.

The report concluded that savings rates need to “rise sharply” for households hoping to maintain the same standard of living in retirement if real asset returns remain low.

Likewise, advisors may need to modify expected returns in planning software to provide clients with more realistic projections on meeting long-term spending goals.

Annuities Look Good

Annuities are a product that continues to look good in virtually any retirement planning portfolio, Finke said.

“One of the points that we make is that in a low-bond-yield environment, where no one is earning very much on their bond investment, the mortality credits that you earn on your annuity are even more important,” he explained.

A good strategy is to consider either full immediate annuitization or deferred annuitization. One of the benefits of buying a deferred annuity is you can buy mortality credits in a buyer’s market, Finke said.

Annuitizing not only brings peace of mind in the form of income you can’t outlive, he added, it also frees up the rest of a portfolio.

“When you do take a portion of your portfolio and use it to buy an annuity, really you’re reducing the income risk with that portfolio. That means the remainder of your portfolio can actually withstand more investment risk than if you had not annuitized at all,” Finke said.

There is no magic bullet to solve the retirement crisis. At the end of the day, Americans are in fact living longer. Now they just need to figure out the financial part of that good news.

“We’re just going to have to get used to the idea that retirement is more expensive than we thought it was,” Finke concluded. “We’re either going to have to save more or retire later.”

InsuranceNewsNet Senior Editor John Hilton has covered business and other beats in more than 20 years of daily journalism. John may be reached at john.hilton@innfeedback.com.

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