Retiree risks in creating lifetime income

Making income last throughout retirement can be a challenge. Explore the risks retirees face in the first of a series of articles. 

Retirement risks related to aging

Aging baby boomers are now facing the most difficult part of retirement planning: lifetime retirement income, no matter how long they live. Moving from accumulation to distribution, the consequences of not having enough money are harsh if a retiree runs out of money in his or her 80s or 90s—an age when there are few options for recovery.

Today, Americans are healthier and have longer life expectancies than any preceding generation. While this is generally positive, it presents the first of the retiree risks—longevity risk. Today’s retirees and/or their spouses are likely to live into their mid-90s—30 years beyond the normal retirement age of 65! This good news creates bad news for retirees: workers need to accumulate more money in their working years than they may expect, and they need their money to last far longer than they may anticipate.

Another concern that may be the least understood is cognitive impairment. Recent studies have shown that by our mid-80s, more than half of adults show signs of at least mild cognitive impairment, which decreases our ability to make sound financial decisions.1 We’ve all read stories of the elderly being taken advantage of by unscrupulous salespeople. But even when this isn’t the case, there’s a risk that older retirees may make financial mistakes that reduce the value of their investments—and diminish their retirement income.

Financial risks in retirement

This leads to the third substantial risk: withdrawal rate risk. At retirement, the paycheck stops, but the expenses don’t. The issue is, how much money can a retiree safely take out each month to pay the bills? Studies in the mid-1990s suggested that an annual, inflation-adjusted 4% withdrawal rate was “safe.” But recently, in light of low interest rates and other factors, economists are suggesting that a more realistic rate is 3%. This reality is shocking to many retirees, who thought they might be able to withdraw as much as 10% of their retirement money each year.

And these aren’t the only risks. What happens if there is a market downturn shortly after retirement? This sequence of returns risk means that the nest egg gets smaller at the same time the retiree withdraws money. “Stay the course” may be common investment advice while working, but retirees may have to sell investments when the market is down just to pay the bills. The money withdrawn and spent by retirees during the bear market may never be recovered when the market turns around.

The nest egg also may be affected by inflation. Though this hasn’t been a major issue for many years, some are predicting a return of inflation as the economy recovers.

Help make retirement income last

The risks facing lasting retirement income may be daunting, but they can be overcome. Continue reading these articles to learn more about how you can help your participants address these risks by offering an in-plan guaranteed income solution.

To find out how Lincoln Secured Retirement IncomeSM solutions can help meet your participants’ needs, call our Sales Desk at 855-533-2170 or learn more at LincolnFinancial.com/SRI.

1Center for Retirement Research at Boston College, “Cognitive Aging and the Capacity to Manage Money,” http://crr.bc.edu/wp-content/uploads/2017/01/IB_17-1.pdf (PDF) , January 2017. 

Lincoln Secured Retirement IncomeSM solutions are offered as a group variable annuity. Amounts contributed to the annuity contract are invested in the LVIP Global Moderate Allocation Managed Risk Fund, a fund of funds with a balanced allocation. The guarantee is provided by a contract between the client/plan sponsor and Lincoln National Life Insurance Company that provides a plan participant with guaranteed annual retirement income.

THE LVIP GLOBAL MODERATE ALLOCATION MANAGED RISK FUND IS NOT GUARANTEED OR INSURED BY LINCOLN OR ANY OTHER INSURANCE COMPANY OR ENTITY, AND SHAREHOLDERS MAY EXPERIENCE LOSSES. THE STRATEGY USED BY THIS FUND IS SEPARATE AND DISTINCT FROM ANY ANNUITY OR INSURANCE CONTRACT RIDER OR FEATURES.

Lincoln Investment Advisors Corporation manages the LVIP Global Moderate Allocation Managed Risk Fund with consulting services from Wilshire Associates Inc. and Milliman Financial Risk Management LLC.

Lincoln Financial Group® affiliates, their distributors, and their respective employees, representatives, and/or insurance agents do not provide tax, accounting, or legal advice. Please consult your own independent advisor as to any tax, accounting, or legal statements made herein.

A group variable annuity is a long-term investment product designed particularly for retirement purposes. Group annuities contain both investment and insurance components and have fees and expenses, including administrative and advisory fees. The annuity's value fluctuates with the market value of the underlying investment option, and all assets accumulate tax-deferred. Withdrawals may carry tax consequences, including possible tax penalties.

The target date is the approximate date when investors plan to retire or start withdrawing their money. Some target-date models make no changes in asset allocation after the target date is reached; other target-date models continue to make asset allocation changes following the target date. The principal value is not guaranteed at any time, including at the target date. An asset allocation strategy doesn't guarantee performance or protect against investment losses.

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All contract guarantees, including those for guaranteed income, or annuity payout rates, are subject to the claims paying ability of the issuing insurance company. They are not backed by the broker-dealer or insurance agency from which this annuity is purchased, or any affiliates of those entities other than the issuing company affiliates, and none makes any representations or guarantees regarding the claims-paying ability of the issuer.

There is no additional tax-deferral benefit for an annuity contract purchased in an IRA or other tax-qualified plan.

This material is provided by The Lincoln National Life Insurance Company, Fort Wayne, IN, and, in New York, Lincoln Life & Annuity Company of New York, Syracuse, NY, and their applicable affiliates (collectively referred to as “Lincoln”). This material is intended for general use with the public. Lincoln does not provide investment advice, and this material is not intended to provide investment advice. Lincoln has financial interests that are served by the sale of Lincoln programs, products and services.