For many years, the use of annuities for retirement income guarantees often fell along all-or-none lines – either you annuitized the entire amount of income the client needed, or you didn’t. In more recent years, this view has shifted, whether it means just annuitizing a portion of the client’s assets to satisfy some of the income needs, or using a variable annuity with income/withdrawal guarantees to insure at least a portion of the income goals. Although these strategies are viewed by many as a more balanced and “diversified” way to distribute income needs amongst various products and risks – for instance, insuring 50% of the income goal and investing towards the other 50% – it begs a fundamental question: what exactly does it mean to insure half of a client’s retirement income goal?
The inspiration for today’s blog post is drawn from a discussion I had today while visiting Tom Curran and Art Dicker (and some other on Tom’s team) at Curran Investment Management in Albany, New York, after speaking for the FPA Northeast New York chapter. During our conversation, the subject came up about how so many people used to view retirement income guarantees as an all-or-none solution, but that increasingly it seems that the blended approach – where some of the income is guaranteed, and some is allocated to more “traditional” investment vehicles – is a more appealing way to balance a client’s needs for safety and growth.
Personally, my thinking has evolved along similar lines… until recently. After all, it’s hard to argue with the idea of insuring a portion of someone’s income, and then investing for the rest. It seems to balance risk with growth. It ensures (and insures) that even if things go terribly wrong, the client will still have some income (in addition to Social Security?), and won’t go broke. So what’s the problem?
The problem is that, if you’re focusing on what it takes to achieve a client’s goals, just insuring 50% of a goal seems to be a remarkably inadequate solution, if someone is really concerned about making sure that the goals are achieved. After all, if a couple’s goal is to spend $60,000/year for the rest of their lives, then if “the bad stuff” happens and they must rely on the $30,000 (50%) that was insured, then haven’t they still catastrophically failed to achieve their goals? The good news is that they won’t be destitute without income. But if the purpose of the plan was to achieve the goal – the goal has still been failed! The client couple will still have to go through a drastic change in their standard of living; they may still need to sell their house and relocate; they may still be unable to enjoy the niceties of their lives that their spending goal was meant to afford.
In other words, does guaranteeing 50% of your retirement income goal simply ensure that if you must rely on the guarantee, you still failed to achieve your goal? If you really want to achieve the goal, and insuring the goal is important, doesn’t that mean you need to insure 100% of the target, not just a portion of it? And if you don’t really care enough about the goal to insure 100% of it, why bother insuring it at all, since guaranteeing only 50% of your goal simply means that you’re guaranteed to not achieve your goal by relying on that guarantee?
Of course, some people might only use a portion of their portfolio to buy a guarantee for all of the income they need for their basic necessities; but technically, if someone has enough “excess” wealth to fully insure their guarantees and still have wealth left over, they arguably didn’t necessarily need to pay to insure the goal anyway, since by definition they apparently already had a lot of excess reserves left over and available “just in case.” But to say the least, even clients in this situation seem to agree that the guarantee is best served when “all” of the basic goal is insured, not just a part of it.
So what do you think? Is insuring “part” of a goal really an effective way to manage risk, or is it just a guarantee that if the bad stuff really happens, that the client will be guaranteed to fail their original goals?