Thursday, June 20, 2013

Risky Business:  Living Longer Without Income for Life
(American Academy of Actuaries, June 19, 2013)

A discussion paper released by the American Academy of Actuary’s Lifetime Income Risk Joint Task Force. "The discussion paper focuses on the issue of ensuring retirees secure income that lasts their entire lifetime and discusses potential solutions through changes in education, plan design, and federal retirement policy."

"What can be done to lower these [unnecessarily high hurdles to finding the right lifetime income solutions] and better prepare current and future retirees to secure and manage their lifetime income needs."

It is nice to see the Academy taking action on this important topic.

The discussion paper advocates expanding financial literacy and education for prospective retirees, refocusing plan design on lifetime income needs and implementing Federal retirement policies to support lifetime income needs.

While I believe that investing some or all of a retiree's accumulated retirement savings in a life insurance annuity product can be part of a reasonable retirement strategy, it appears to me that the discussion paper over-emphasizes the use of these products relative to other approaches.  While managed structured-income payments are briefly mentioned as a source of lifetime income, the paper points out that such approaches are not guaranteed, and they are not included as part of the paper's discussion of potential solutions through changes in education, plan design and federal retirement policy.

While a good start, I would like to see the Academy take a broader view of the potential solutions to the problems facing current and future retirees.  My specific recommendations to the Academy in this regard include:

  1. The Academy should acknowledge that retirees may want to use some or all of their accumulated savings to provide for their retirement income needs through a structured series of payments rather than through guaranteed lifetime income insurance products.  And, those who make this choice need better guidance than the 4% withdrawal rule set forth in the discussion draft.  As I have indicated countless times, I believe the actuarial approach recommended in this website is one such better approach, particularly if the retiree wishes to coordinate the structured series of payments with other fixed annuity income.
  2. Lifetime income products that provide fixed dollar payments do provide payments for life (and therefore appear to address one of the paper's definitions of Lifetime Income Risk), but those payments will be eroded by future inflation.  Therefore, income may become inadequate over time (and may not address another of the paper's definitions of Lifetime Income Risk).  Communication of such fixed dollar amounts in defined contribution plans may be misleading because it can overstate real dollar income throughout retirement and it may also be misleading if participants do not elect to purchase an annuity at retirement.  The Academy may wish to consider these factors when discussing this issue with policymakers.
  3. Retirement planning generally does not end at retirement.  It is an ongoing process involving periodic assessment of many factors.  Education changes and potential solutions proposed by the Academy should address this reality.
  4. As noted in the discussion paper, the risk pooling argument in favor of investing in insured annuities is compelling.  But this argument must also be weighed against anti-selection and profits built into insurance company pricing.  The Academy may wish to explore ways to make these items more transparent to consumers.
  5. Given its relationship with the insurance industry, the Academy may wish to consider exploring whether it should be disclosing a potential conflict of interest when discussing the pros and cons of life insurance annuity products in accordance with Precept 7 of the profession's Code of Conduct.