Retirement income planning is the new buzz in the financial media, with baby boomers more focused on a secure stream of income in retirement than on a large nest egg at retirement. As 10,000 baby boomers reach retirement age 65 each day in America — a trend that will last well into the next decade — understanding this distinction has never been more important.
But the financial services industry has struggled with providing consumers a meaningful way to secure retirement income. Instead of embracing approaches that reduce risk and lock in guarantees earlier in the planning process, the industry remains tethered to old ideas where these guarantees — if offered at all — can wait until the point of retirement.
This is a problem, as the market volatility that occurred in June underscores. Unexpected down markets just before retirement can devastate plans, as many people experienced during the 2008-2009 financial crisis.
Instead of waiting, boomers and their financial professionals need to leverage what we call the "transition period" — the five to 10 years before the retirement date — to secure income streams and help reduce the risk of volatility and uncertainty.
Boomers and their financial professionals have traditionally relied on the 4 percent rule — building a portfolio of stocks and bonds and then withdrawing 4 percent of that portfolio in retirement, as the only strategy needed for a secure retirement.
Many boomers who planned to follow this approach, and built a nest egg large enough to cover annual retirement expenses at a 4 percent withdrawal rate, faced an unfortunate choice after the 2008-2009 market downturn. They could either reduce their standard of living, continue to work, or increase their withdrawal rate and significantly raise the risk of running out of money.
Another approach is to count on steady and growing markets to help ensure that boomers have accumulated enough assets to convert to income through a single-premium immediate annuity. But this approach entails the combined risks of down markets before conversion and potentially low prevailing interest rates leading to low annuity payouts.
An alternate approach is for boomers five to 10 years from retirement to secure income guarantees before their retirement date.
But transition boomers have a lot to learn. In a 2012 Allianz Life survey of more the 1,000 transition boomers (ages 55-65), one-third reported being unsure of how much money will be needed to cover basic living expenses in retirement.
Of these, 64 percent were ages 55 to 60 and 36 percent were between 61 and 65 years old. When asked about their biggest concerns in retirement, 28 percent said they feared "not being able to cover basic living expenses."
One quarter appeared to be uninformed about the effects of inflation and more than 40 percent may not have a realistic idea of when retirement planning should begin.
The survey also elicited disturbing responses about expected sources of income in retirement — 30 percent indicated they expect some retirement income from part-time work and 20 percent anticipate income from either an inheritance (9 percent) or "other sources" (11 percent).
Perhaps the most troubling finding of the Allianz Life survey is that only 14 percent of transition boomers said they can count on guaranteed income from an annuity. These few boomers appear to be the only ones who have taken a step to secure the "need to haves" in retirement — food, clothing, medical care and shelter — through an insured solution.
The financial media have started paying more attention to annuities. Not all of that coverage has been flattering. The financial press has called deferred annuities complex, expensive and opaque. Some of those criticisms are valid and some are based on a lack of understanding of the unique role of annuities: lifetime income.
But by locking in a guaranteed income stream through a deferred annuity in the years before retirement, boomers can protect a portion of their assets from market declines and have an income to help cover their basic needs.
This could allow the remainder of their portfolio to be held in riskier, non-guaranteed, financial products to fund the "nice to have" aspects of retirement — e.g. dining out and recreation.
By building the guarantees of a deferred annuity into their strategy — with some new annuities offering the potential for income increases while in retirement (which may come in the form of optional, additional cost riders) — a transition boomer can take much of the fear and uncertainty out of their retirement income planning.
Walter White is president and CEO of Allianz Life Insurance Company of North America, which sells deferred annuities and other insurance products.
