What You Need to Know
- Many clients like the investment options available inside annuities.
- Others want more control over the portfolio.
- For some, the answer may be contingent deferred annuities.
As the wave of retirees swells, with an average of 11,000 Americans turning 65 each day and an anticipated 30% surge in the senior population by 2030 , the urgency for retirement income solutions intensifies.
Amid this demographic shift, managed accounts have also witnessed explosive growth in recent years.
Assets started at $2.8 trillion in 2012. Projections now point to the number exceeding $15.6 trillion by 2026.
In fact, managed accounts growth has outpaced that of mutual funds for the first time .
However, this expansion casts a spotlight on a critical shortfall: the lack of income protection for these assets. Currently, just 2% of the $34 trillion of retail retirement assets are safeguarded against longevity risk.
Most financial advisors rely on unprotected systematic withdrawals, a precarious stance underscored by results of a Prudential Market Research survey: 81% of advisors said they preferred this strategy.
This presents an undeniable challenge: how to deliver protected, sustainable income to a growing number of future retirees without upending the foundational practices of financial advisors’ businesses.
![Among advisors who implement decumulation strategies for their clients' retirement savings, most (81%) use a systematic withdrawal program with a customized investment strategy developed by them. Retirement Savings Decumulation Strategy Used Most Often: 1. A systematic withdrawal program with a customized investment strategy developed by you: 81% 2. A systematic withdrawal program customized to meet your clients' needs using a target date fund strategy: 16% 3. Other systematic withdrawal program strategy: 3%](https://images.thinkadvisor.com/contrib/content/uploads/sites/415/2024/08/2024-8-21-blanchett-decumulation-strategy-graphic_PGIM_800x350-Copy.png)
A New Approach: Insurance Overlays
For decades, financial experts have recognized the benefits of allocating a portion of retirement savings to strategies that can potentially generate longevity-protected income. Yet, adoption of annuities remains low, especially within the managed money space.
A solution that addresses the most common concerns about traditional annuity products is a contingent deferred annuity: a CDA.
One way to think about a CDA strategy is as an insurance overlay covering part or all of a managed account portfolio.
For an additional fee, an insurance overlay brings the potential of lifetime income and protection to retirees, helping them manage the risk of outliving their assets or to more freely spend what they’ve saved.
Unlike a traditional annuity, an insurance overlay does not require a retiree to sell all or part of their managed account portfolio to transfer to an insurance company. The retiree simply pays an annual fee for the overlay.
If the protected portion of the portfolio is depleted during their lifetime, they continue receiving income for life, depending on the terms of their insurance overlay.
While some investment advisory platforms offer overlay strategies that provide tax efficiency or environmentally focused portfolio positions, this insurance overlay concept addresses longevity risk and does not turn over any discretionary investment authority to the insurance company.
Portfolio discretion remains with the advisor — though the advisors’ decisions may be subject to certain restrictions.
Though the CDA structure has been around for more than a decade, the technology platforms that make implementation faster and easier have evolved.
It’s these technology innovations that now make overlays an exciting and viable option in the field of longevity-protected income. They also address a number of the concerns financial advisors have shared over the years about some lifetime income products, as we will discuss later in the article.
The Decumulation Problem
While some advisors embrace annuities as a way to generate protected income for clients, there are a number of potential barriers.
For example, an advisor may feel they don’t have the same investment flexibility or that the investments available in an annuity are not what they typically use. There could be concerns regarding the tax implications of generating income from an annuity along with additional expenses.