In Looming Sequence-of-Returns Risk Battle, Annuities are “…the missing piece of the retirement income puzzle.”

Investment News Contributing Editor Mary Beth Franklin reports that two major themes emerged from the recent Retirement Income Summit in Chicago: the economic impact of increasing longevity, and the need for guaranteed lifetime income as one American turns 73 every seven seconds (source: Joseph Coughlin, MIT Agelab).

Certainly, the Retirement Income challenge is exacerbated by a growing population of retirees. Fewer of them can rely on pensions for income, and as that population grows, there are fewer workers to support them with payments into the social security system. The pressure placed on those benefits will require new legislation and behavioral changes to address it.

However, the more immediate challenge for retirees in the 5 – 10 years prior to, or just in retirement is sequence-of-returns risk. Investment losses in this “fragile decade” can have a major negative impact on a retiree’s future spending power. Because life expectancy is rising, that risk becomes more meaningful.

As the 10-year bull market continues to age folks believe that a correction may be overdue. Americans in the “fragile decade” are facing market forces that we’ve never experienced before. With stock valuations so high and interest rates so low, an environment has been created in which BlackRock senior managing director Mark Wiedman says, “Savers are being punished for being savers.”

Without a major revision to client plans, expert Wade Pfau believes that William Bengen’s 4% rule may not deliver the necessary outcomes for investors. Insurance companies, with their unique ability to pool risk, improve payouts with mortality risk credits, and offer tax deferral are uniquely positioned to help solve these problems. But the annuity puzzle remains a puzzle.

During a presentation at the Summit, Weidman wondered aloud, “Why isn’t there a bigger annuity market in the U.S.? It is the missing piece of the retirement income puzzle.” This is a great question, especially as new, next-gen annuities have come to market with valuable guaranteed lifetime withdrawal benefits advisors can use to bridge the “fragile decade” without forcing annuitization.

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