The financial industry has yet to widely embrace a solution for America's retirement income problem, although a solution may lie in investment and insurance products, according to a panel of investment management executives.
Panelsts at the Morningstar Investment Conference in Chicago last week said we’re likely just scratching the surface of the problem as more retirees leave the workforce dependent on income they saved themselves in lieu of an employer-supported pension.
“You’re now seeing people with no legacy defined-benefit [plan] retire,” said Anne Lester, portfolio manager and head of retirement solutions for J.P. Morgan Asset Management’s Global Investment Management Solutions. “That problem is only now beginning to become acute. There’s going to be a different demand drive than there has been before.”
Thus far, most of the innovation in investment product development has focused on the accumulation phase of an investor’s life, said Lester. But with growing ranks of baby boomers entering retirement, the time has come for products that address the decumulation needs of investors, she said.
Lester said that even very wealthy investors feel anxious about the possibility of outliving their savings. The anxiety leads to unnecessary frugality and under-consumption, she said.
In some cases, she said, the anxiety has prompted investors to craft elaborate portfolios designed to capture enough interest and dividend income to address their spending needs.
“With high interest rates, you could live off of dividends and interest, but we don’t live in that world anymore,” said Lester.
With the 10-year Treasury yielding just below 2.4 percent, and the S&P 500’s dividend yield averaging just above 1.8 percent, it’s difficult to create a low-cost income stream with investments alone.
The low-interest, low-return environment is going to create serious retirement income problems for investors and asset managers alike, said Brett Sumsion, a portfolio manager at Fidelity Investments.
“One of the concerns we have is where we are technically in the capital markets,” said Sumsion. “What the capital markets are providing for today—we’re worried about how that interaction goes. We’re at an extreme, considering GDP potential, labor force growth and productivity growth. This is the reasoning around ‘lower for longer.’ Interest rates are anchored to those same forces.