Interest Rates Put Squeeze on Guaranteed Income

Sustained low interest rates and market volatility are putting Americans’ retirement security at risk, according to Prudential Financial.

Add longevity risk to that, and it increasingly makes sense for people to include guaranteed retirement income products, such as annuities or guaranteed products within defined contribution plans, in their portfolio, according to a research report from Prudential titled, “Should Americans Be Insuring Their Retirement Income?”

The continued volatility of the equity markets is prompting many investors to turn to conservative investments, but should interest rates remain low for an extended period, Americans’ savings will not be able to grow to a level that will sustain them throughout their retirement, Prudential said. Retirees also tend to favor conservative investments, which in today’s unprecedentedly low interest rate environment, just aren’t delivering adequate returns, Prudential said.

“While the majority of Americans insure their most valuable assets in order to safeguard against significant financial loss, many don’t think to insure their ability to generate lifetime income,” said Bob O’Donnell, president of Prudential Annuities. “Today’s guaranteed income products were designed to help protect retirees from running out of income in retirement, regardless of market conditions or increased longevity.”

“Life insurance helps families manage the risks of not living as long as expected, while guaranteed retirement income products help Americans manage the risk of outliving savings in retirement,” O’Donnell added. “This paper clearly demonstrates the real risks of a sustained period of low interest rates and market volatility to Americans’ retirement security, and the potential benefits of strategies that provide guaranteed income through retirement.”

The paper reminds investors and their financial advisers that “market uncertainty is a much greater risk in the years just before and just after retirement because investors have less time to recover from any losses.”

The full report is here.