June 20, 2018
Many workers in their 50s and 60s worry about whether they’ll have enough savings for a comfortable retirement, of course, but they also have another big financial fear: How can they essentially recreate their paycheck so they can count on steady, reliable retirement income? A new initiative from a consortium of financial services companies — with the slogan Retire Your Risk — hopes to help address that concern.
The recently released Franklin Templeton Retirement Income Strategies and Expectations survey shows the dilemma. It found that 52% of workers are “concerned about managing retirement income to meet expenses” and more than a third of those who are within five years of retirement said they “did not have a strategy to recreate a paycheck.”
Nearly Half of Pre-Retirees Lack ‘Protected Income’Similarly, the Alliance for Lifetime Income (that new group of 24 life insurers and asset managers including Jackson National Life, Nationwide, Prudential and TIAA) says that 48% of U.S. households ages 45 to 72 with $75,000 to $1.99 million in investable assets are approaching their retirement years “unprotected,” without what it calls “protected monthly income” other than Social Security.
It’s not very surprising, though. Very few of them will get pensions from their employers. Consequently, they’ll need to cobble together a retirement income strategy using savings withdrawals and Social Security to cover necessities and, ideally, discretionary expenses (fun).
Why Many Don’t Buy Annuities for Retirement IncomeThere’s a financial product that’s been around forever designed specifically to help people receive steady, reliable retirement income: It’s called an annuity. But very few people buy annuities, for two big and rational reasons. They’re often maddeningly complex and come with both high fees and stiff surrender charges (costs incurred to end the annuity). Some annuities don’t even explicitly break out their fees.
A new retirement income study by Hearts & Wallets, a financial services research firm, noted that just 13% of retiree households are getting income from annuities, down from 15% in 2016.
The Goals of the Alliance for Lifetime IncomeThe Alliance for Lifetime Income’s goals are to reduce the complexity of annuities, lower their fees, help financial advisers better explain them and refocus the national retirement discussion to talk about lifetime income planning, not just accumulating assets. Its Retireyourrisk.org website has a comparison chart showing how annuities compare with bank CDs, stocks, bonds, mutual funds and ETFs as well as a list of questions to ask a financial adviser about protecting your retirement income. They’re worth a look, but just remember the source providing them has a strong pro-annuity bias.
‘Too Damn Complicated’“One objection advisers and consumers have had about annuities is they’re too damn complicated,” says Colin Devine, Alliance for Lifetime Income educational adviser and former managing director at Smith Barney Citigroup. “I couldn’t make sense of them when I was buying mine.”
For the campaign to be successful, Devine says, over the next year or two, annuity companies and advisers will need “products they can convey in an elevator pitch.”
Muted Applause By Retirement Income AnalystsSome retirement income experts applaud the initiative but express some skepticism about it. They think many pre-retirees and financial advisers have strong reservations about annuities.
“How do you convince us we need more annuitized wealth? Americans aren’t used to buying insurance with six-figure lump sums,” Kerry Pechter, editor of Retirement Income Journal, wrote on LinkedIn. Also, Pechter added, “annuity issuers have built rocket-science products that blend insurance and investment characteristics, billing them as ‘the best of both worlds.’ That’s a shaky position to maintain: Many fee-only advisers see them as expensive investments, not as risk management tools with upside.”
Walter Updegrave, my former Money magazine colleague who now writes the excellent RealDealRetirement blog, is my go-to person on the subject of annuities. I asked him what he thought about the Alliance for Lifetime Income’s initiative. Here’s what he said:
“I’m all for educating people about the benefits of lifetime retirement income and trying to explain how complex, and aggressively marketed, annuities like fixed indexed annuites and variable annuities actually work. But I hope the Alliance will also let people know that there are annuities out there, specifically immediate annuities and longevity annuities, that while less heavily promoted, are much easier to understand.
“And if the Alliance really wants to help people protect a portion of their retirement income, I also hope it will demonstrate how retirees can combine less complicated immediate and longevity annuities with a traditional investment portfolio of stocks and bonds to create a cost-effective comprehensive retirement income plan that can ensure monthly income for life while also providing liquidity and long-term growth.”
You can learn more about Updegrave’s thinking on the approach of combining an immediate or longevity annuity with a traditional investment portfolio in the column he wrote, “The Smart Way to Get Guaranteed Income for Retirement.”