Annuities: The Answer to Longevity Risk

annuitiesHow much can one spend in retirement without exhausting retirement assets? How long will the assets be needed? The uncertainty of life span complicates the distribution phase of retirement planning. The major risks of retirement are longevity risk and market volatility risk. A balanced portfolio should address both. Investment strategies can reduce market risk but cannot mitigate longevity risk. Only the combination of investments and insurance products, in this case annuities, can protect a retiree from both.

An annuity provides a lifetime, guaranteed distribution. Regardless of market conditions, interest crediting rates or longevity, an annuitant can rely on receiving a known income. Social Security benefits are essentially a lifetime annuity. Defined benefit pensions, a previously common employee benefit is now a thing of the past for most workers. Along with Social Security benefits pension distributions offered guaranteed income and a comfortable retirement, supplemented by investments. Today, most retirement portfolios are primarily investments supplemented by Social Security benefits. Retirees count on generally positive market returns to grow the value of the portfolio.

The strongest retirement portfolios combine growth strategies with guaranteed income strategies. That is investments and partial annuitization of some retirement assets. Neither investments nor annuities are a panacea. Each has advantages and disadvantages, pros and cons. Together though the combination makes for a more secure retirement.

Annuities benefit from the insurance company’s position to invest large sums for long periods. An individual has limited ability to withstand market highs and lows. An insurer is not affected to nearly the same degree.

A retiree depending solely on income from investments bears the entire longevity risk. The guaranteed aspect of an annuity shifts the longevity risk from the retiree to carrier. Without a guaranteed income component, spending or draw down of retirement assets can be unnecessarily restrictive. The uncertainty about how long one will live leads to protecting the asset balances above all else. A guaranteed income, especially one sufficient to cover essential costs of living, offers greater freedom and flexibility to the plan for distributions from investments. The income certainty allows equity assets can be invested to capitalize on long-term returns.

Women are especially vulnerable to the longevity risk. The average life span for a woman is almost six years longer than a man. Not only do women live longer than men on average, retirement assets are lower due to lower working salaries and time away from the workforce while to raise a family.

An overlooked advantage of the guaranteed income from an annuity is the simplicity of the plan. As cognitive skills decline, decisions about investments may have to be transferred to a spouse or third party. Not so with the income stream from the annuity, benefits will continue for as long as originally planned.

Some financial professionals are concerned with the limited liquidity of annuities. Assets are surrendered to purchase the annuity. The industry responded by allowing for an annual withdrawal up to a stipulated percentage, usually 10 percent, and without incurring a surrender-charge. Advisors may also be wary of the impact of inflation on the annuity payment. That only emphasizes the importance of both a guaranteed income and growth component in the portfolio.

Today’s annuity products come with optional features that make for greater financial flexibility. Inflation protection riders are available, many offer a living benefits feature that can be used to pay long-term care expenses or terminal illness expenses. Fixed index annuities reached a new sales record in 2016 and while the DOL Fiduciary Rule may impact sales in 2017 sales the long-term outlook for fixed annuities is strong. Indexed annuities, similar to indexed universal life products, participate in some of the upsides of a bull market, with limited exposure to market downturns. Longevity annuities, are intended to fill the gap between income needs and investment returns in the later retirement years. Usually purchased at retirement age 65, with a single premium, benefits are not distributed until age 85 or so.

Deciphering fixed from immediate, variable from fixed indexed, single premium from flexible premium requires some study. Brokers Central has spent many years developing an expertise in annuity products. Given the details about the client’s retirement objectives and available assets we will serve as your expert guide to selecting a suitable annuity product. Let us help you to help your client avoid longevity risk. Call us at 845-495-5000.

Paul is the Vice President of Sales at Brokers Central, with more than 20 years of financial services experience under his belt, most recently as a Regional Marketing Specialist for Prudential Insurance.View Paul’s bioContact Paul.