As people live longer, they need their retirement income to last longer, too. Plan sponsors are increasingly seeking solutions that provide enough retirement income for the most participants, but powerful forces can sidetrack progress toward that goal. Even if participants make years of steady contributions and maintain thoughtful asset allocations, an ill-timed market downturn or change in interest rates when approaching retirement can be devastating.
But there’s an effective solution to these pitfalls. It starts with securing a guaranteed income stream earlier—and systematically—while still working, and not shifting the bulk of savings to a purchase at a single point in time on the threshold of retirement.
Avoiding (Or Embracing) Risk with the Help of Time
People can’t predict market or interest-rate movements, but they can plan and protect against uncertainties. The goal is to minimize the volatility of future income, and the key is to secure it by purchasing guaranteed income a little at a time.
Steadily buying guaranteed income, ideally starting 10 to 15 years before retirement, does three important things. First, it gradually ensures an income level by locking it in, which eliminates exposure to a narrow set of market conditions (especially poor ones). Next, it adds downside protection, which allows for more equity exposure—and growth potential—closer to retirement, when most investors typically seek to reduce equities. Finally, it delivers real-time feedback to participants well before retirement, so they have the time to plan and adjust.
Retirement assets also face sequence-of-returns risk, when account balances suffer losses in participants’ final working years. Without a secured income, sequence risk is magnified by point-in-time risk, which leaves behind a smaller stake to buy guaranteed retirement income at the pivotal moment right as retirement arrives.
Point-in-time risk was especially painful for investors amid the more iconic market downturns, such as the global financial crisis and most recently during the early months of the COVID-19 pandemic. As markets dropped, they took retirement savings down with them, leaving a lot less participant buying power while guaranteed rates dropped, too—lowering guaranteed income for life (Display).
