Annuities are like kale – good for you, but you have to get past perceptions first. And you might need a good dressing to find them palatable.
Advisors could be dressing up an interesting annuity salad that could help clients stretch their retirement savings a little farther, researchers at Fidelity Investments said. The idea is to make better use of the deferred income annuity, said Matthew Kenigsberg, vice president of financial solutions for Fidelity.
Kenigsberg will be joined by Chris Moeder, senior analyst at Fidelity, at the LIMRA 2016 Retirement Industry Conference in Boston. Their session is titled, “Kale in the Smoothie: Challenges and Solutions in Retirement Income.”
“People are retiring earlier than they expect,” Moeder said. “And people are living longer, which makes the challenge of providing retirement income obviously a lot more difficult.”
The “kale” in the smoothie is the fact that if a consumer uses a DIA to cover all their expenses from age 86 to 95, the costs of their retirement are lower, Kenigsberg said. How much lower depends on the rate of return on the client’s investments.
“We want to propose, essentially, a new way of using an old product,” he said. “A new way of considering its benefits and I think it could be powerful in the marketplace.”
Kenigsberg explained how it works: A traditional annuity strategy is to break up every dollar of savings by putting 30 cents into an immediate annuity and 70 cents into liquid assets.
‘A New Approach’
Instead, a better option is to put the 30 cents, or a little less, into a DIA, the Fidelity researchers said. When you turn 65, you spend from your liquid funds.
“One of the things that we’ve done in order to explain the benefit of that to people is to look at the required internal rate of return that is implied by the pricing of DIAs, and I think that is a new approach,” Kenigsberg said.
Using a DIA as a hedge against late-in-life spending needs produces a higher annuitized return, and provides a definitive timeline for budgeting your remaining savings. Otherwise, retirement experts differ on whether the traditional 4 percent drawdown figure is still responsible and effective.
“If we know how much money you’re going to have available right now to cover all of your expenses from age 65 and age 85, we can compute a required internal rate of return,” Kenigsberg said. “We can figure out what rate of return you would need to generate in order for that plan to work and we can compare that to other possibilities.”
Most clients don’t realize how long they will live, he added, and that creates a need for creative retirement funding solutions. On average, people are retiring four years earlier than they projected and living four years longer than they expected.
“That’s eight years longer than they expected,” Kenigsberg said. “That’s huge. That is a gigantic change and that requires us to do something drastic.”
InsuranceNewsNet Senior Editor John Hilton has covered business and other beats in more than 20 years of daily journalism. John may be reached at [email protected].
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