The solution in question, a Contingent Deferred Annuity ("CDA"), unbundles insurance protections from underlying investments enabling Registered Investment Advisors (RIAs) to wrap client brokerage accounts, IRAs, or Roth IRAs with portfolio income insurance.
“It is possible for an institution to guarantee that a retiree will always be able to spend a fixed amount in retirement no matter what happens in financial markets,” writes Dr. Finke, who also serves as Professor of Wealth Management at The American College. “Portfolio insurance through a CDA provides the freedom to spend within one’s financial planning boundaries, without the fear of running out of money due to events out of one’s control.”
Preserving client spending in retirement is a critical objective for financial advisors that continues to grow in importance as Americans live longer, stirring fears of longevity risk. Insuring their portfolio prevents retirees from having to choose between a much higher risk of running out of money or of cutting back on spending to maintain a comfortable amount of income security.
"As longevity continues to improve, there is a growing concern among American workers that they may not have enough money to live at their current level, through retirement,” said David Stone, Co-Founder and CEO at RetireOne. "Dr. Finke’s studies demonstrate that a CDA can help consumers establish a reliable stream of income that can potentially rise in positive market conditions or protect against diminished spending in the event of market downturns."
Dr. Finke finds that the certainty of lifetime income provided by a CDA may give individual investors the assurance to not only spend confidently, but to continue to invest in equities without the fear that a market downturn will force them to spend much less than planned in retirement.
"If stocks outperform bonds, the retiree will accumulate a larger nest egg over time," writes Dr. Finke. "Greater retirement wealth can result in higher spending or a more substantial legacy as a reward for accepting investment risk. However, if investments underperform early in retirement, a retiree can continue to spend the same guaranteed amount despite a much higher risk of outliving savings."