A generation ago, workers who got Social Security and pension payments could generally count on having enough money to see them through their golden years.
But today that retirement income formula won’t necessarily provide the financial security it once did, according to Prudential’s new report Should Americans Be Insuring Their Retirement Income?
Sustained low interest rates, market volatility and longevity risk are the most significant risks to Americans’ retirement security, says Prudential. And if interest rates stay low, retirement assets invested conservatively will have little investment growth and may be exhausted earlier than expected.
Continued volatility in the equity markets creates significant “sequence of returns risk,” when the order of investment returns results in losses at or near retirement, making those losses difficult to make up. Plus, people are living longer, so it increases the chances that they’ll exhaust their retirement savings while still alive.
Prudential’s white paper discusses the likelihood of the average retiree exhausting his or her retirement savings based on three scenarios for a hypothetical retiree named “Jean,” age 65. She has a $300,000 portfolio that is invested 60 percent in equities and 40 percent in bonds and carries expenses of 1 percent a year. She plans to withdraw $15,000 a year to supplement Social Security.
In scenario one, she lives to her expected lifespan of 90, there's no market volatility and her gross return is 8 percent annually. In each Monte Carlo simulation for that scenario, she avoids exhausting her nest egg. But the report acknowledges that it's unrealistic to think investment returns won't vary or that she's certain to live to her life expectancy. When those variables are introduced, her assets are depleted in 420 of 2,000 simulations. In scenario three, the risk of interest rates remaining at Dec. 31, 2011, levels is also introduced, and Jean's assets are depleted in 1,080 of 2,000 simulations.
Prudential’s report recommends consumers invest in “retirement income insurance” -- such as individual annuities or guaranteed income products built into defined contribution plans -- to reduce the risk of outliving one's assets.
Kimberly Supersano, chief marketing officer for Prudential Annuities, says retirees are facing a number of key risks. Those circumstances, including the low interest rate environment, means many of them won’t meet their retirement goals, she said.