We recently collaborated with Dr. Michael Finke, Professor of Wealth Management at The American College, on a white paper entitled, “Portfolio Income Insurance – Understanding the Benefits of a Contingent Deferred Annuity.” In the white paper, Dr. Finke talks about market risk and how it impacts retirement spending, the stress that increased longevity can put on retirement savings, and a potential solution to these problems:
“It is possible for an institution to guarantee that a retiree will always be able to spend a fixed amount in retirement no matter what happens in financial markets,” writes Dr. Finke, who also serves as Professor of Wealth Management at The American College. “Portfolio insurance through a CDA provides the freedom to spend within one’s financial planning boundaries, without the fear of running out of money due to events out of one’s control.”
His assessment must have resonated, because the release of the white paper was picked up by a few outlets. Here’s a sample.
CDAs allow retirees to stay invested via ETFs and mutual funds, draw a steady stream during retirement, but also protect themselves against most volatility risks via the approach of longevity risk pooling—where portions of the CDA premiums will be used to provide payments to long-lived retirees.
Finke’s research showed that “the certainty of lifetime income provided by a CDA may give individual investors the assurance to not only spend confidently, but to continue to invest in equities without the fear that a market downturn will force them to spend much less than planned in retirement…”
“If stocks outperform bonds, the retiree will accumulate a larger nest egg over time,” writes Dr. Finke. “Greater retirement wealth can result in higher spending or a more substantial legacy as a reward for accepting investment risk. However, if investments underperform early in retirement, a retiree can continue to spend the same guaranteed amount despite a much higher risk of outliving savings.”
All guarantees are subject to the claims-paying ability of the insurance company.