The proportion of
retirees in the US relying on interest from their savings who are
at risk of outliving their financial resources is growing
alarmingly, according to a new study by Boston College. However,
for insurers offering inflation-indexed annuities it represents a
big opportunity, reports Charles Davis.


In its latest National
Retirement Risk Index (NRRI), a snapshot of American readiness for
retirement, the centre for retirement research at US university
Boston College paints a dismal picture, albeit one with rich
potential for the life insurance industry.

It shows that the proportion
of households “at risk” for retirement jumps from 51% to 60% when
retirees live off the interest from their assets instead of
purchasing an inflation-indexed annuity to provide a guaranteed
stream of retirement income.

Pull quote from Alicia H Munnell, Boston CollegeBoston College’s
research, which is sponsored by Nationwide Mutual Life Insurance
Company, highlights that while many households focus on
accumulating assets for retirement, it is equally important that
they have a plan in place to get as much as possible out of those
assets during retirement. The NRRI measures the share of American
households “at risk” of being unable to maintain their
pre-retirement standard of living in retirement.



The Index uses the
conservative assumptions that people work to age 65, receive income
from reverse mortgages on their homes and annuitise all of their
financial assets. The new fact sheet examined what would happen if
households did not purchase an annuity to provide lifelong

“It’s critical for today’s
workers to not only invest for retirement but to also have a plan
in place to manage their assets once they retire,” said Alicia H
Munnell, director of the centre for retirement research and one of
the authors of the study, in a comment on the study.

She added: “Purchasing an
annuity is one way that households can ensure that they don’t
outlive their assets but the reality is that most people do not
choose this option. We decided to explore what impact removing the
annuitisation assumption would have on the retirement outlook of
American households in the Index.”

The study also examined two
alternative scenarios to annuitisation. The first alternative was
that households drew down their assets at a rate of 4% per year, a
common strategy suggested by financial planners and investment
professionals. The second scenario examined what would happen if
households lived off the interest on their accumulated wealth
(estimated at 1.9% annually).

The results show that
assuming households lived off the interest of their accumulated
wealth had the biggest impact on the NRRI, increasing the
percentage of households deemed “at risk” from 51% to 60%. The%
deemed “at risk” increased from 51% to 53% for those that drew down
their assets at a rate of 4% a year.


Good news for

The good news for the life
insurance industry is that the study suggests that annuities
provide more monthly income in retirement than simply drawing down
assets or living off the interest on assets, and can be a valuable
tool to help households plan for retirement.

The study found, when
examining households by income, individuals with a high net worth
were most impacted by not annuitising their assets. The% “at risk”
increased from 42% to 47% for those who drew down their assets at
4% a year and increased from 42% to 57% for those living off the
interest of their assets (estimated at 1.9% annually).

This result can be explained
by the fact that higher income households typically rely on the
return on their assets more than their lower income counterparts,
who are more likely to rely on Social Security for most of their
retirement income.

“The latest analysis of the
NRRI demonstrates the important role that annuities can play in
helping people plan for retirement,” said Brad Davis,
vice-president of retirement income solutions for Nationwide
Financial Services, in a release. “It also highlights an
opportunity for advisors to help educate clients about what options
are available as they develop their retirement income


Tax increases a big

The greatest risk factor
identified by the NRRI is the potential for tax increases in the
future. The result is a three percentage-point rise in the NRRI,
which conservatively assumes that higher taxes do not affect
households’ retirement savings rate. If households were to respond
by cutting back on their saving, the rise in the Index would be
much greater.

The study explores what
happens if taxes increase to help bridge the gap between government
revenue and spending, a likely scenario given the precarious
federal budget.

“Significant tax increases
are likely in the coming years,” Munnell said. “On the surface, it
appears higher taxes will have a modest effect on retirement
readiness with the exception of high-income households at the verge
of retirement. However, the Index only reflects part of the story,
as younger households would also face substantial reductions in
consumption both before and after retirement.”

The study found that when
examining households by income level and age, Early Baby Boomers
(those born between 1946 and 1954) in the top income bracket were
most impacted by higher taxes. The% of these households “at risk”
increased from 37% to 49%. This effect from higher taxes is greater
than that of the 2008 equity market crash.

Potential tax increases have
a lesser effect on the retirement readiness of younger households,
as they have more time to adjust to paying higher taxes. However,
the modest increase in the number of younger households “at risk”
only tells part of the story.

The research assumes that to stay on track for retirement,
younger workers will need to significantly reduce their consumption
both before and after retirement. In fact, younger, high-income
households will need to reduce their consumption by 10%.