When Social Security was designed, life expectancy was only a few years beyond retirement. Workers who got Social Security and pension payments could generally count on having enough money to see them through their golden years.
But today, according to Prudential’s new report Should Americans Be Insuring Their Retirement Income, the old retirement income formula may not provide the financial security it once did. Sustained low interest rates, market volatility and longevity risk (living longer than your money lasts) are the most significant risks to Americans’ retirement security. Since the Federal Reserve intends for interest rates to stay low through 2015, retirement assets invested conservatively may have little investment growth and may be exhausted earlier than expected.
Continued volatility in the equity markets creates significant “sequence of returns risk,” when the order of investment returns results in losses at or near retirement, making those losses difficult to make up because the time to retirement is too short. Because people are living longer, this increases the chance that they’ll exhaust their retirement savings while still alive.
Prudential’s report recommends consumers invest in “retirement income insurance” such as individual annuities or guaranteed income products to reduce the risk of outliving one’s assets.
The report pointed out the following facts:
- Individuals routinely insure valuable assets; however, far fewer insure their ability to generate lifetime income.
- During working years, an individual’s most valuable asset is often the ability to work and generate income.
- The two main risks to being able to generate income are premature death and disability. Individuals can insure themselves against the impact of these risks.
- When approaching and then entering retirement, an individual’s most valuable asset may be the savings from which he or she must generate retirement income.
- Three significant risks to being able to generate that income are longevity risk, market uncertainty and an extended period of low interest rates.
The impact of these risks can be harsh and retirees can find themselves with a substantial income shortfall should their assets be exhausted. The good news, however, is that individuals can help protect themselves against the impact of these kinds of risks as well.
Guaranteed lifetime income products can provide this protection, and can help provide peace of mind. While your goals and needs may change over a lifetime, your income can be protected with proper planning and the use of appropriate annuities.