New White Paper Explores How Annuities Fit Into The New Formula For Retirement
Today’s retirees – and those nearing retirement – face new, and complex, financial challenges. While 11,000 people retire every day, most do so without a pension to provide steady income, relying solely on Social Security and their own accumulated savings. At the same time, life expectancy continues to climb, increasing the likelihood that these retirees might “outlive their money” or have to significantly reduce their lifestyle in retirement to make their savings last.
One solution is to create a stream of monthly income that, similar to a pension, provides a steady source of income for the lifetime of the retiree. Methods for doing that vary, but can include a bond ladder, a diversified portfolio of stocks and bonds, or using some of the accumulated savings to purchase an annuity.
In a white paper prepared for the Alliance for Lifetime Income, Wade Pfau, professor of retirement income at The American College of Financial Services, and Emilio Pardo, co-chair of the Operating Committee for the Alliance, model each of these methods to see how they perform in providing protected lifetime income.
Their conclusion: “Many advocates for investment-only retirement strategies have not fully accounted for the additional risks created by investments – particularly longevity risk and sequence-of-returns risk – when transitioning from pre-retirement savings to post-retirement distributions. As a greater appreciation develops about these risks, it is critical that the conversation evolve to include the important role that the options for protected lifetime income can play in building reliable and efficient retirement plans.”
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The authors find that the ability to pool the longevity risk of the retiree with others in similar circumstances gives the annuity a significant advantage in generating lifetime income.