Michael Finke, Ph.D.
Imagine that you decided to retire at the end of 2021 and were planning on spending $25,000 each year from a $500,000 balanced portfolio of stocks and bonds. Before this year, you would have had about an 80% chance of being able to fund 30 years of income. Fast-forward to today, when your portfolio is down 20% or more, would you still feel comfortable spending $25,000?
How much would you pay to know that, despite recent poor market performance, you could still withdraw $25,000 a year and not have to worry about how your investments are doing or even how long you will live?
This type of protection is available through a lifetime income benefit guarantee on annuities, also known as a Guaranteed Lifetime Withdrawal Benefit, or GLWB. Designed to protect retirees during market downturns, annuities with a GLWB allow retirees to generate a specific amount of income, that can potentially increase throughout retirement, no matter how long they live or how their portfolios perform.
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Retirees value lifetime income insurance because it reduces the emotional burden of investment losses. Without it, the uncertainty can result in anxiety that affects quality of life in retirement. Nearly two-thirds of consumers said that they worry about their finances several times a month, and one-quarter worry about their finances every day, according to the third Protected Retirement Income and Planning Study from the Alliance for Lifetime Income and CANNEX.
In a new white paper published by the Retirement Income Institute, we explore how to think about the costs associated with guaranteeing lifetime income. There are no free lunches in personal finance, so it is important to understand the cost of providing lifestyle insurance in retirement, typically about 1% of the balance of the account, for life, to provide the guarantee.
Those costs are often mischaracterized as an “expense” or a “fee,” not as an insurance premium. The former describes reduction in investment value in exchange for an immediate service — the sale of a financial product, for example — whereas the latter is a payment made to an insurance company with the expectation that a portion of it will be returned to the policyholder through claims they make.
Like any other form of insurance, annuities can protect you from a significant loss of wealth that otherwise might have occurred because of market declines. For those in or planning for retirement, leaving your assets unprotected means putting at risk the lifestyle you envision for yourself.
Many retirees have found that the peace of mind is worth the insurance premium one pays to get the guarantee of a lifetime income insurance premium. Protected streams of income can help you afford your desired lifestyle in retirement regardless of what happens in the markets. Now more than ever, retirees see the value of incorporating these benefits into their financial plan.
David Blanchett is managing director and head of retirement research with PGIM. Michael Finke is professor of wealth management, WMCP program director, director of the Granum Center for Financial Security, and Frank M. Engle Chair of Economic Security at the American College of Financial Services. Both are Fellows of the Alliance for Lifetime Income – Retirement Income Institute.
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