COVID-19 Magnifies The Retirement Income Crisis

By Eric Henderson

The retirement income crisis is real — and the COVID-19 pandemic has intensified the challenge. Four in 10 investors (41%) with investable assets of $100,000 or more said they are concerned about losing their life savings due to COVID-19, according to an April survey from the Nationwide Retirement Institute.

The study, “The Future of Client-Advisor Relationships,” found that as clients’ needs evolve, the model of a financial professional also must evolve.

As Americans confront the pandemic’s new normal, they are struggling to cope with many competing mental, physical and financial concerns. But having enough money to live in retirement does not have to be one of them. Why are so many Americans concerned about their income in retirement, and where can they turn?

What Is Causing The Retirement Income Crisis?

Long before the pandemic began, there were concerns about disappearing pensions and the solvency of Social Security.

The Wharton School at the University of Pennsylvania had already estimated that the Social Security trust fund, challenged by record-low interest rates and sluggish wage growth, was on track to be depleted by 2036. More recently, they determined that the pandemic’s impact on job losses, payroll tax revenues and the length of the recession would accelerate this depletion date by several years. They predicted that following the pandemic, a quicker V-shaped recovery could deplete the trust fund by 2034, and a slower U-shaped recovery could deplete the trust fund as soon as 2032.

Meanwhile, companies have been moving away from traditional pensions for decades in order to shift the expense and the risk off their balance sheets. COVID-19 added even more pressure. Nearly half of the S&P 500 companies still have hundreds of billions of dollars in pension obligations on the books. But facing the perfect storm of the pandemic’s impact as well as record-low rates and pressure from shareholders and other investors, many have stopped offering these plans to employees.

Still other companies are freezing benefits, and many more are looking for ways to eliminate this “liability” by offering employees lump-sum payments to take their money and leave their plans. For employees with public pensions, Pew Charitable Trusts found that there was a $1.24 trillion funding gap prior to the start of the pandemic. Now there are concerns that the gap could increase by another $500 billion.

Where Does This Leave Investors?

As a result of these trends, a growing number of investors are forced to rely on their qualified retirement savings plans as a primary source of income in retirement.

Unfortunately, during the pandemic, many were also forced to rely on their qualified plans as an emergency resource. Although qualified plans are designed for long-term savings, the CARES Act passed in late March allowed investors to make penalty-free early withdrawals for certain financial hardships, such as avoiding foreclosure or covering medical expenses.

Our survey also revealed that 16% of investors were willing to sell shares from their qualified plans to help cover their expenses if COVID-19 impacted their ability to meet their financial obligations. Although an early withdrawal might provide near-term relief, many investors who go this route have been forced to lock in losses and stunt their long-term earning potential.

There’s a bigger challenge. Although qualified plans are a source of tax-deferred or tax-free savings, most do not currently offer asset protection or guaranteed income, meaning investments and retirement income are subject to market risk. The SECURE Act, passed with bipartisan support late last year, is aiming to change this. This new legislation paves the way for plan sponsors to offer employees in-plan guarantees to protect their future stream of retirement income.

Where Can Investors Turn?

There is a silver lining. As the pandemic has progressed, investors have recognized the need for solutions that offer protection for their portfolios and provide guaranteed income — beyond the traditional means of Social Security and pensions.

Our survey shows that following drops in the market and extreme volatility, more than half of investors (51%) said COVID-19 made them recognize the need for annuities to protect their investments against market risk. More than half of investors (51%) also said the pandemic made them recognize the need for annuities to protect their retirement income.

For advisors and financial professionals, annuities can be a critical component of your clients’ holistic financial plans. Annuities can mitigate market risk and offer guaranteed income in retirement, to help increase clients’ confidence and ease their fears. Annuities can supplement other sources of retirement income such as Social Security or help bridge an income gap before Social Security starts. And with a floor of guaranteed income in one portion of their portfolio, your clients can invest another portion of their portfolio more aggressively for greater growth potential to fund a retirement that can last two to three decades or more.

Among the many types of annuities, registered index-linked annuities and variable annuities with guaranteed lifetime withdrawal benefits can help your clients accumulate more tax-deferred savings for retirement after they’ve maxed out their qualified plans — and help them generate more guaranteed income in retirement.

Sometimes referred to as structured or buffered annuities, RILAs are becoming increasingly popular because they can offer your clients a balance of both upside potential and downside protection. Clients can participate in stock market growth based on the performance of one or more underlying indices, such as the S&P 500, Russell 2000, MSCI EAFE or NASDAQ 100. They are provided a level of protection against market loss through a structure such as a buffer or a floor.

With a buffer structure, the insurance company typically absorbs a first level of loss, and then the client absorbs any loss beyond that level. For example, if the buffer level is set at 10% and the underlying index declines 30%, the insurance company will absorb the first 10% of the loss, and then the client will absorb the next 20%.

Record drops in the stock market earlier this year raised concerns and brought back bad memories for many clients. While the market recovered quickly this time, concerns that another market drop could remain lower for longer next time underscores the importance of a floor structure. Limiting losses with a clearly defined level of protection could make the difference between being able to retire on schedule or not.

VAs with GLWBs. With VAs, your clients have the greater earnings potential, but also the potential for greater risk. Clients can select from a range of underlying investment options, including asset classes such as stocks, bonds and alternatives.

As the value of these underlying investments fluctuates based on movements in the market, so will your clients’ contract value. If your client is more risk-averse, they may be able to purchase optional guarantees that will provide a level of downside protection or return of principal.

By adding a GLWB, clients have a “living benefit” that can provide a guaranteed lifetime withdrawal from their annuity, typically based on a fixed percentage of the asset value or benefit base. There is a wide variety of GLWBs available, with different features and benefits, so it is important to find one that will provide your clients a guaranteed income stream to best fit their unique needs.

There are GLWBs offering a consistent guaranteed income stream that will never decrease throughout their retirement. There are other GLWBs with greater equity exposure that provide a variable income stream with more upside potential for both asset accumulation and income during retirement. Some GLWBs may offer a front-loaded income stream, with higher income during the first part of retirement to meet anticipated expenses or to bridge an income gap.

What Can You And Your Clients Do Next?

In your role as an advisor or financial professional, it is crucial to listen to your clients and understand their goals. Protecting their life savings and having guaranteed retirement income they can’t outlive will frequently rise to the top of their priorities. But they may be intimidated by the challenge, especially when confronted by this complex new normal.

That’s where you come in. By listening and understanding, you can help your clients define their goals and develop a holistic plan to reach them. By taking the time to educate clients and help them to understand annuities, you can help increase their confidence and ease their fears.

Although some annuities have been perceived negatively, the industry has changed, and many products have evolved. When you help clients choose the right annuity to meet their unique needs, they can protect their assets without fear of losing it all in a market downturn today, so they can confidently grow their life savings for the future and solve the retirement income challenge.