Allianz Life Insurance Company of North America (Allianz Life) has released a research paper that finds America has entered a new wave of retirement thinking focused on "guarantees" and "lifetime income," replacing a previous wave that was more concerned about "rate of return" and "control."
Authored by Allianz Life President & CEO Gary C. Bhojwani, "Rethinking What's Ahead in Retirement" identifies three waves of retirement thinking since World War II. In the first wave just after the war, baby boomers' parents focused on financial "safety," with the bulk of their assets held with banks and life insurers. The boomer-led second wave centered on rate of return and asset mix, leading to the rise of mutual fund investing. Today, concerns about market risk have led to a surge in demand for "guaranteed lifetime income" in retirement planning.
"The three-legged stool of retirement funding – government via Social Security, employers through defined benefit plans, and individual savings – is less reliable than ever before," Bhojwani said. "Two of the three legs are shaky, which means personal assets are taking a bigger role to keep the stool upright. Boomers now know they may outlive their assets and thus must learn how to convert those assets into guaranteed retirement income."
Using proprietary research, as well as government and industry data, Bhojwani identifies land mines dotting the retirement landscape. Longer life expectancies and ongoing medical breakthroughs mean Americans will likely need their assets to last longer than they expected. Health care costs continue to rise, putting more pressure on retirement savings.
But perhaps the least understood risk is the impact of sequencing of returns. Even with a solid nest egg at retirement, Bhojwani shows that depending on the timing of the initial withdrawals and how the market performs during those years, a person could face a gap of up to 13 years in how long their money will last.
"While it is hard enough to accurately project an average annual return over an extended period of time, it is essentially impossible to project specific returns each year and determine how they will affect a distribution strategy in retirement," Bhojwani writes.
The paper suggests that insurers are in a unique position to pool overall longevity and financial risk and are thus able to give people the opportunity – in the form of annuities – to guarantee a stream of income that can last throughout retirement. Guarantees are backed by the financial strength and claims paying ability of the issuing insurance company.
"Americans have come to grips with the new reality that it is nearly impossible to feel secure about retirement income if some of it is not guaranteed," Bhojwani said. "The fear about outliving one's assets is very real. This is fundamentally changing the behaviors of all consumers and is a catalyst for new thinking."
To download a copy of the white paper, go to www.allianzlife.com.