The demographic tidal wave for contractual guarantees
Ten thousand baby boomers retire every single day. Life expectancies have increased which means that people are living much longer. And a large portion of Americans either don’t understand the stock market, have lost trust in it, or are afraid of potential volatility. These are facts that can’t be disputed, and the reason that some investors are choosing risk-transfer strategies even in this low-interest-rate environment. The stark reality is that many people actually want guarantees. And that group of people is only getting larger. A lot larger.
Lifestyle over risk
Even though I have clients nationwide, the message seems to be the same regardless of location. People are placing more value on lifestyle than potential growth when it comes to their money.
As I tell all of my clients, “there are no U-Hauls behind hearses.” Enjoy life, and live for the day. That’s hard for some savers and Depression Era age groups, but health, family and quality of life will always be more important than stock-market growth. Guarantees within a portfolio can definitely be a part of this lifestyle solution.
Annuities are just one piece of the puzzle
Even though I only specialize in all annuity types, these contractual guarantees are just one piece of the risk transfer pie. Products like CDs, highly rated municipal and corporate bonds, selected REITs and MLPs, and blue-chip dividend stocks can also part of the “lifestyle play.”
Specific types of annuities can contractually solve for lifetime income, legacy, and confinement care coverage, but should only be a portion of your overall plan.
There’s no ROI till you die
With your Social Security, pension, or lifetime income payments from annuities, there is no Return on Investment (ROI) until you die. Up until that fatal moment, the income stream is a pure transfer of risk.
With income guaranteed for life using specific types of annuities, the income stream is based on your life expectancy at the time the payments start. It’s an actuarial bet with the issuing annuity company, and they are on the hook to pay regardless of how long you live and even if there is no money left in your account.
It’s OK to transfer some risk
There is no argument against the fact that equities have historically produced stellar returns over long term periods, but many people either are not that patient or don’t have the time frame needed for sustained growth.
Everyone needs to ask themselves, “How much risk am I willing to shoulder, and how much risk am I willing to transfer?” By the way, there is no perfect answer, and some people see no need to transfer any risk at all.
Pensions in a pension-less world
We all know that most companies no longer offer a traditional pension, and it seems like the only employer pension left are for government workers. Most employee retirement plans are “Defined Contribution,” and focus primarily on accumulation instead of future income.
Everyone needs what I refer to as an “income floor”. That is the income stream that is guaranteed to hit your bank account every month regardless of how long you live. It’s the only dollar figure that my wife cares about because it will fund her lifestyle and trips to see our daughters and future grandchildren. Social Security is the starting benchmark for most people’s income floor, but is typically not enough to cover the needed dollar amount.
This is where guaranteed risk-transfer strategies can contractually fill in the income gap to provide the lifestyle you desire. Whether it’s a specific type of annuity, bond, REIT, MLP, or dividend stock, more and more people are looking for those guaranteed solutions. That demographic tidal wave is getting bigger every day, with no end to this consumer demand in sight.
Originally published 9.21.16 as a Retirement Mentor on MarketWatch.com.