IRI Promotes Need for Guaranteed Income for Retirement

According to the Insured Retirement Institute, systematic withdrawal strategies, whether a simple “x%” rule or based on a more sophisticated stochastic analysis of the probability that assets will not be depleted at various withdrawal rates, have two significant drawbacks.

The 4% rule, proposed by William Bengen in the 1994 paper “Determining Withdrawal Rates Using Historical Data,” is outdated, the 2019 Insured Retirement Institute (IRI) Fact Book contends.

 

An underlying assumption of the rule is a 50% allocation to stocks, and a 50% allocation to bonds, but with interest rates at historic lows and equity markets at historic highs, expected returns may well be much lower in the future, IRI says. “Withdrawal rates can vary widely based on the portfolio assumption used and the desired probability of success,” it adds.

 

According to IRI, systematic withdrawal strategies, whether a simple “x%” rule or based on a more sophisticated stochastic analysis of the probability that assets will not be depleted at various withdrawal rates, have two significant drawbacks: first, they are based on historic asset class returns, which may not repeat in the same sequence in the future, and secondly, they assume that the investor acts rationally, maintaining the asset allocation assumed in the models even during periods of significant negative returns. However, many consumers may weight more heavily toward cash and cash equivalents after a period of negative returns, and miss out on subsequent positive returns. This is why it contends there is a need for the use of products and solutions that guarantee income and/or protection against principal loss and other risks regardless of market conditions.

 

IRI notes that with longer life expectancies and health care costs trending higher, retirement continues to get more expensive. For example, if a person has annual expenses of $50,000 in retirement. Expenses for a 65-year-old living 14 years in retirement would total $700,000. Expenses for a 65-year-old living 19 years in retirement is $950,000, an increase of 36%. Factoring in inflation, assuming an annual rate of 3%, a 65-year-old living 14 years to age 79 would need $854,000 in income to meet his or her expenses. And by living an additional five years to age 84, he or she would have total retirement expenses of $1,256,000, 47% higher.

 

According to Fidelity estimates, a 65-year old couple retiring in 2019 can expect to spend $285,000 in health care and medical expenses throughout retirement. The IRI notes that Medicare does not provide complete coverage. Long-term care is another significant component of health care costs in retirement, one which many mistakenly assume is always covered by Medicare. IRI’s 2019 Boomer study showed half of respondents believed long-term care would be covered by Medicare.

 

The IRI Fact Book discusses risks retirees will face—longevity risk, inflation risk, health care risk and sequence of returns risk—to make its case for the need for guaranteed income in retirement.

 

It is a guide for the retirement income industry and go-to resource for financial advisers, professionals, public policymakers, and financial and insurance regulators. The new edition updates research findings on generational retirement readiness, explores product development and market trends in the retirement income space, and offers data and research-based insights into advisers’ practices and consumer retirement planning success factors. It includes in-depth descriptions of fixed, fixed indexed, income and variable annuity products and features.

 

A digital or print version of the IRI Retirement Fact Book may be purchased from here.

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