Think of it as retirement income insurance
Writing for Kiplinger, RetireOne President Ed Mercier addresses the need for retirees to pensionize retirement savings so that they may navigate sequence of returns risk and longevity risk effectively. As American retirement plans have shifted from defined benefit to defined contribution plans the aforementioned risks were also shifted from institutions to individuals.
Ed explains how a contingent deferred annuity (“CDA”) can help convert retirement accounts into sources of guaranteed income for life, thereby offloading that risk to a team of hedging experts at an insurance company.
The CDA as a retirement technology is a major innovation that figures to be a big part of the industry’s future. Devising strategies for spending down retirement assets is a very complicated task. Annuities offering guaranteed lifetime income (subject to the claims-paying ability of the insurance company) can help simplify decumulation for advisors and their clients.
By unbundling the insurance protections from the underlying assets, the CDA further simplifies the ongoing management of assets by keeping them at the custodian, and it offers the flexibility to turn the coverage off if or when clients have safely navigated the “fragile decade.”
Just as individual investors insure their homes, so too can they insure their retirement income via the CDA. Here’s how Ed describes it:
A CDA acts as a sort of “risk wrapper” for your IRAs, Roth IRAs and taxable brokerage accounts, but the insurance portion is unbundled from the underlying accounts so that investments in ETFs and mutual funds may be covered. The amount of income you receive from the CDA (your coverage base) is calculated from the total of your initial investment, and will not drop below that amount, no matter what the markets do. In fact, your coverage base may go up, and those annual income payments can range from 3% to 6%. Keep in mind that excess withdrawals CAN impact your coverage base, however.