Solving the Biggest Risk in Retirement

You may have heard it: YOLO. It’s an abbreviation used by the youth, code for “you only live once.” It makes you wonder if older Romans once rolled their eyes as the kids yelled, “Carpe diem!”

Yet, in America, thanks to numerous advancements in medicine, public health and safety infrastructure, the cries of “life is too short” are somewhat lost for those in and approaching retirement, who are better off asking, “What about if life isn’t too short?”

When it comes to financially preparing for retirement, of course, we have many risks to address, such as long-term care risk, market risk, withdrawal rate risk, sequence of returns risk, mortality risk, inflation and deflation risks, regulatory risks, fluctuating tax risk. Health risks, in particular, can be life-changing as they affect your memory, mobility and basic functions, such as vision and hearing.

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Longevity risk, however, is chief among all the risks, because it’s a risk multiplier. Think about it: The longer you live, the bigger all those other risks get. So, if you want your money to last as long as you do, you must do whatever you can to remove longevity risk.

Sure, you want to address each risk in its own fashion. That means looking at life insurance products with their death benefits to address the possibility of an early death or taking a look at market products that can help address inflation concerns. To tackle the risk of a long life, though, we need to look to products or strategies that offer consistent and reliable streams of income.

Unfortunately, most of the tools in the average retiree’s portfolio — stocks and bonds, mutual funds, money market accounts, real estate, gold and commodities — don’t guarantee income. What options offer guaranteed income?

1. Social Security of course is one source. In a consumer survey for the Nationwide Retirement Institute, conducted online in February by The Harris Poll among 1,013 U.S. adults ages 50 or older who are retired or plan to retire in the next 10 years, over half of the respondents (55%) say Social Security will be their main source (opens in new tab) of retirement income. Considering the average monthly benefit will be $1,461 in 2019 (opens in new tab), according to the Social Security Administration, they may want to rethink that. And what happens if Social Security payments are reduced in the future?
2. Pensions are another option, for public employees and the few remaining private sector employees who have them. Yet, it’s pretty clear that most retirees can no longer count on an employer-sponsored pension as a reliable income stream. Fewer companies are offering them, some have been mismanaged and others never fully recovered from economic downturns. Many union and public pension systems — whose employees have long been able to depend on these benefits — are facing daunting shortfalls.
3. With Social Security and pensions’ futures looking cloudy, more pre-retirees and retirees are taking the reins and setting up their own income streams, using an emerging third option to help reduce their longevity risk: annuities.

The safest way to maximize happiness in retirement (besides keeping your sense of humor) is to minimize risk. If you’re approaching retirement — even if you’re a decade or more away — do some research, ask some questions and consider the value of the protected lifetime income offered by an annuity, such as:

• A lifetime income annuity (known as a single premium immediate annuity or SPIA);
• A deferred income annuity; and/or
• A lifetime income/withdrawal benefit rider attached to an annuity.

Before the mention of the word “annuities” makes you cringe, just know they tend to get a bad rap because people don’t know much about them or the different options available. All annuities are not created equal — and the ones that get it right are starting to receive positive attention from retirement professionals and investors alike due to the promise of lifetime income.

According to the Alliance for Lifetime Income, a nonprofit group that advocates for holistic retirement planning, annuities are the only solutions that combine growth potential, downside protection and a guaranteed income stream. And yet, the organization claims fewer than two out of five Americans (opens in new tab) (38%) have a pension or annuity to supplement their Social Security income in retirement. That’s too bad, when you know that researcher Roger Ibbotson’s projections show that including annuities (opens in new tab) in a portfolio instead of relying solely on traditional market products gives retirees a higher probability of success at having their money last as long as they do.

As the kids say, YOLO — but you may want to plan for it to be a good, long time, so you can do what you’d like for as long as you’d like. George Burns once said, “You can’t help getting older, but you don’t have to get old.” Good advice. Thanks, George.

Kim Franke-Folstad contributed to this article.