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.
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.
David Blanchett, PhD, CFA, CFP®, is Managing Director and Head of Retirement Research for PGIM DC Solutions. PGIM is the global investment management business of Prudential Financial, Inc. In this role he develops research and innovative solutions to help improve retirement outcomes for investors with a focus on defined contribution plans. Prior to joining PGIM he was the Head of Retirement Research for Morningstar Investment Management. He is currently an Adjunct Professor of Wealth Management at The American College of Financial Services and Research Fellow for the Alliance for Lifetime Income. David has published over 100 papers in a variety of industry and academic journals that have received awards from the CFP Board, the Financial Analysts Journal, the Journal of Financial Planning, and the International Centre for Pension Management. In 2014 InvestmentNews included him in their inaugural 40 under 40 list as a “visionary” for the financial planning industry, and in 2021 ThinkAdvisor included him in the IA25+. When David isn’t working, he’s probably out for a jog, playing with his four kids, or rooting for the Kentucky Wildcats.
- Michael Finke, Ph.D.Chief Academic Officer, The American College of Financial Services
Six Steps to Take if You've Recently Inherited Money From a Loved One
It’s important to deal with the emotional aspect first before tackling the financial one.
By Kiplinger Advisor Collective Published
Alaska Airlines to Buy Hawaiian: Get Bonus Miles Now
How to use the Alaska Airlines credit card and frequent flyer program to save on trips to Hawaii, Alaska and beyond.
By Ellen Kennedy Published
11 Reasons to Consider a 1031 Exchange
Deferring capital gains taxes might be at the top of the list, but growing your portfolio and your wealth and helping with estate planning are also compelling reasons.
By Daniel Goodwin Published
Why It’s Time to Give Bonds Another Look
Yields are much more attractive now, but you should use discretion to find the bond allocation that’s best for you.
By Bill Aldrich, CLU® Published
Estate Planning and the Legal Quirks of Retiree Cohabitation
Creating an estate plan for an unmarried couple is already challenging, but when the cohabitating couple are in their golden years, it’s especially tricky.
By David Handler, J.D. Published
Seven Financial Planning Stops to Put on Your Map to Financial Security
Creating a comprehensive plan is just the start, though. Checking in regularly to make sure you’re still on track is imperative.
By Michael E. Lewis II, CFP®, CLU®, ChFC® Published
How to Measure the Health of Your Retirement Plan
These five key indicators can help you make decisions based on the overall performance of your retirement plan rather than individual variables.
By Brian Skrobonja, Chartered Financial Consultant (ChFC®) Published
Four Easy Ways to Get Yourself Fired
Being a standout on the job can sometimes be as simple as showing up to meetings on time, responding promptly to requests, doing your homework and not being a jerk.
By H. Dennis Beaver, Esq. Published
How Might the Great Wealth Transfer Change Society?
As $84 trillion in assets move from Baby Boomers to younger generations, we could see a greater emphasis on financial technology and investing based on values.
By Jennifer Wines, JD, CPWA® Published
Why More Retirees Might Come Out of Retirement
It’s often not solely because of financial reasons, but because of a lack of purpose in retirement. This financial expert can relate.
By Chris Blunt Published