Insuring Retirement in the Midst of Uncertainty

(BPT) - One of the longest economic expansions in American history may have come to an end in the face of a global pandemic. The economy today brings to mind for many the lessons of 2008-2009, during the Great Recession when millions of Americans on the doorstep of retirement watched helplessly as a lifetime of savings vanished, leaving them to wonder how they would be able to buy food, let alone take vacations or pursue leisure activities.

Meanwhile, Americans are living longer, which is a wonderful thing. Yet, it comes with challenges. The Great Recession and the current coronavirus pandemic uncovered the risk inherent in historical reliance on accumulating savings and “safe” withdrawal rates for meeting expenses in retirement without the backstop of a guaranteed retirement income base beyond Social Security. The risk is even greater when you consider that life expectancies are near record highs according to the U.S. Centers for Disease Control. The average millennial has more than a 2-in-5 chance to live to age 90.

Research from Prudential shows, however, that while having enough savings to last through retirement is individuals’ top financial goal, only 60% are confident they will achieve that goal — possibly because less than half of individuals even know how much money they’ll need to cover expenses in retirement.

Against this backdrop, the ensuing impact of coronavirus once again leaves Americans concerned about whether they’ll have enough to get by in retirement, or ever be able to retire at all.

“Facing a low interest rate environment, volatile markets and almost surely a new recessionary period, investors are considering the lessons learned in 2008 to avoid putting their retirement plans in jeopardy and running the risk of outliving their savings,” notes Dylan Tyson, president of Prudential Annuities. “In any environment, annuities can be a critical tool for many Americans to help protect their assets and secure a protected income stream in retirement.”

Annuities come in different forms, including variable, fixed, hybrid and even investment-only versions. Most provide guaranteed income in retirement that can be insulated from stock market fluctuations and interest rates — areas that have been increasingly hard to predict for those entering or in retirement.

The most straightforward annuity is a fixed annuity, which is typically invested in a fixed account so the principal value is protected. Because the income rate is guaranteed, the rate of return can be lower with these types of annuities, but many individuals prefer the stability these products provide.

Variable annuities typically allow purchasers to invest their principle in an investment portfolio, and account values vary — as the name implies — based on market fluctuations. This type of annuity carries more exposure to equity markets, which can mean more risk, but also higher returns.

Another option growing in popularity in the current market climate is indexed variable annuities, which allow investors the opportunity to capture some of the market upside if that does occur, and can offer some protection against a downturn. Also called registered index-linked annuities, hybrid, structured or buffered variable annuities, indexed variable annuities are typically tied to the performance of an index such as the S&P 500. These annuities provide a measure of protection if the index underperforms, while also providing investors the ability to grow their assets on the upside.

“Although there are plenty of annuities that provide forms of guaranteed income, individuals have traditionally been faced with a choice of choosing between downside protection or growth potential when they purchase an annuity,” adds Tyson. “Hybrid solutions offer the best of both worlds, providing the opportunity to lock in a protective ‘buffer’ against market losses and options to capture gains as markets rebound.”

Shoring up retirement finances has taken on new urgency in light of the coronavirus pandemic, as the market moves toward recession, job losses mount and health issues compound financial challenges for many Americans. Planning for greater longevity and an extended retirement will take decisive action on the part of individuals, before they lose the benefit of time to bolster their financial readiness. Annuities are one tool that can provide stable income in retirement, allowing more Americans to enjoy their golden years.