“It is a real challenge for retirees today that people are living longer, with retirements now lasting 20 to 30 years and interest rates being so low,” said Jonathan Barth, registered investment adviser (RIA) consultant with DPL Financial Partners, speaking during a webinar the company sponsored, titled, “Practical Market Assumptions for Today’s Retirement Realities: Why Adhering to Traditional Income Strategies No Longer Works.”
“Some bonds are returning as little as 1%, and some are even negative,” Barth said. “This is making advisers look at different solutions to secure retirement income.”
Michael Finke, a professor of wealth management at The American College, said that, historically, bonds have returned 5%. “Depending on their maturity, Treasurys are delivering about 1%, and corporate bonds, 1.5% to 2%,” he said, explaining that all-in it now costs about $150,000 to buy annual income of $1,000 from bonds. “Investing more heavily in equities seems to be the only answer, but they are becoming quite expensive. Valuations today are as high as they have ever been. This is depressing for new retirees.” Annuities, Finke added, can provide comparable income at a much lower cost
David Blanchett, head of retirement research, Morningstar, said it is imperative for advisers to lower return assumptions in their models. In the next 10 years, Morningstar forecasts that cash will return 0.6%, bonds 1.2%, equities 5.7%, international bonds 1.5% and international equities 6.3%, he said. Morningstar’s forecast beyond the next 10 years for bonds is 4.8%, for U.S. equities is 9.0%, for international bonds is 4.4% and for international equities is 7.6%, he added. “This is bad news for investors, but you have to give them a realistic assumption,” Blanchett said.
Barth said: “How are advisers adapting to low bond returns, high uncertainty, increasing life expectancy and fee compression? We surveyed 200 practices and found they are increasing risk in retirement plans, and are increasingly interested in annuities to deliver a secure retirement for their clients.”
The survey also revealed that 43% of advisers said their clients are delaying retirement, 59% said their clients are saving more, 46% are taking more risk in their portfolio and 50% are spending less, Barth noted.
Finke said it has become important for advisers to consider “the advantages of annuitization in a low interest rate environment. You just can’t get as much from your safe investments as you used to. You can get 40% more income in retirement through annuitization than through bonds, and you are free from the risk that you are going run out of money. This enables retirees to spend their money on things that can make them happy in retirement.”
DPL’s survey asked advisers how they are adjusting portfolios to address low yields for clients nearing retirement, Barth said. Nearly one-third (30%) said they are delaying the transition from equities to bonds, 18% are actually increasing equity allocations, 26% are increasing their clients’ savings—but only 7% are turning to annuities, he noted.
Finke said there is a “tremendous disconnect between academics and practitioners when it comes to annuities. We all know that annuities are the best tool to safely fund a retirement. Advisers must consider using this tool if they are to do their job properly.”
Barth said that even though so few advisers are currently using annuities, 68% said they would consider using them—and not just to produce income. They also like their principal protection, tax-efficient legacy planning and wealth accumulation properties, Barth said.
Finke said it is time for advisers to be honest about return projections and the value of annuities. “If you run your Monte Carlo with realistic expectations about asset returns, you are going to come up with very different conclusions about the safety of your investment portfolio,” he said. “I’m not being pessimistic. I’m just being realistic. All of a sudden, insurance products become more attractive.”