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The Importance of Clarifying Longevity Risk

Change the retirement income conversation while there’s still time.

By Michael Harris

There’s a silent but looming retirement crisis in America that too few people are aware of.

The concept of retirement has changed dramatically starting with the baby boomer generation, with many retirees wanting to pursue a very different kind of life in retirement—starting businesses, volunteering and pursuing their passions. But too many consumers—even those with six- and seven-figure portfolios—may be forced to greatly downsize their lifestyle in retirement because people today run a much greater risk of outliving their money because they’re living longer. The average lifespan in the U.S. has increased by 17 years since Social Security began in 1935. On top of longevity risk come the related risks of the impacts of inflation and market volatility.

Despite these risks, nearly half (48 percent) of U.S. households in the 45- to 72- year-old age range with $75,000 to $1.99 million in investable assets are “unprotected,” with no source of protected retirement income other than Social Security or, for the lucky few, a pension. This statistic comes from an analysis of Federal Reserve data by the Alliance for Lifetime Income, a new nonprofit founded by 24 leading financial services organizations to help educate Americans about the need for protected lifetime income.

With traditional defined benefits plans disappearing and Social Security estimated to replace only about 40 percent of the average person’s income— even less for wealthy consumers—millions of Americans are vulnerable to falling into the retirement income gap. This is the void between the income they will receive from Social Security, savings and investments and what they will need to meet their retirement goals.

Unfortunately, this reality impacts more than consumer’s wallets. According to a survey recently commissioned by the Alliance, it also affects their well-being.

  • Unprotected families (those without protected retirement income other than Social Security) are nearly 3.5 times more likely to say financial stress or retirement worries have caused anxiety, depression or related problems.
  • Conversely, for protected households, 80 percent are confident they can withstand losses in the markets or unexpected expenses, issues that can be particularly problematic in retirement for those who are unprepared. Conversely, only 63 percent of unprotected households are confident.
  • Likewise, protected families are 1.5 times more likely to say they’re very confident they’re financially prepared to achieve their retirement lifestyle goals versus unprotected families.

Given these sobering realities, the financial services industry has an urgent mandate to help change the retirement planning conversation. Having worked alongside wealth managers and financial advisors for more than three decades, I’ve seen how well many of them collaborate with clients during the accumulation phase of their financial life. For decades, the retirement planning conversation has focused almost entirely on accumulating savings, fueled in large part by the rise and popularity of self-funded 401(k) plans, IRAs and similar products. Unfortunately, these hard-earned savings are not sheltered from the financial impacts they face from market downturns, rising healthcare and other costs, and longer lifespans. The focus on accumulation has caused us to overlook a critical component of a comprehensive retirement plan—protecting part of retirement savings with lifetime income from an annuity.

Today the industry has a unique opportunity to raise awareness among consumers and advisors alike of the need to consider the comprehensive financial life cycle: accumulation, distribution, including protected retirement income, and transfer.

It all begins with educating Americans about the potential retirement income crisis and the need to focus not only on accumulation for retirement, but on planning for protected income they can count on every month during retirement. The next step is showing consumers the peace of mind and freedom from worry they can gain when they protect part of their retirement income with a form of protected income, such as an annuity.

So what can advisors do? Use conversations centered around managing the above-mentioned comprehensive financial life cycle to power the protected income conversation with clients. With today’s retirees potentially spending as many years in retirement as they did working, an advisor can combine their knowledge of the financial life cycle with skill and experience to bring true wisdom to a client for decades to come.Ultimately, it’s about helping solve a huge social problem with critical support from advisors. After all, no one cares more about a consumer’s best interests than their trusted advisor.

It’s also about changing the language and the way we talk about annuities. For example, we all know there’s an alphabet soup of annuity riders: GMIBs, GLWBs and GMWBs. Clarifying and simplifying the language of annuities to make them easier to understand and value is a key initiative. We must also strive to facilitate discussions of the major misperceptions of annuities that exist in today’s marketplace.

In an era when people have become accustomed to paying to protect their everyday possessions (think smartphones and appliances), it’s time to educate them about protecting arguably their most important asset—their future in retirement.


Michael Harris is an Educational Advisor to the Alliance for Lifetime Income. He recently retired as vice president and head of the Advanced Solutions Group for Lincoln Financial Distributors.

TAGS: Fixed Income
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