by John Darer CLU ChFC CSSC RSP CLTC
This troubling headline screams out from the front page of one of the British newspapers I perused on a transatlantic flight between London and New York July 4, 2013. Discussing common defined contribution pension plans,where the employee absorbs the investment risk of his or her retirement savings, the article states " any increased pension that they might be expecting from the recent rise in annuity rates could have been cancelled out by the fall in the value of their pension pot and they may have to think again about retiring-if it not too late to do so". The problems cited in the headline exists on both sides of the Atlantic. The writer is referring to the now common practice of accumulating a pot of money and then annuitizing it through the purchase of an immediate annuity to produce income guaranteed for life. (continued, below "side bar")
Side Bar on Why Pension Risk Has Substantially Shifted to Employees Over The Years
In "the old days" defined benefit pension plans were very common. You retired with proverbial "gold watch" and a lifetime guaranteed income. My maternal grandfather retired in 1962 with a defined benefit pension from his company. When he died in 1969, those payments continued to my grandmother for 24 years, until her death. The defined benefit plans that your father or grandfather had, became very expensive to employers as market interest rates drifted downward from their 1980s pinnacle. Some employers fell victim to their own overly optimistic actuarial assumptions. Some municipalities and other government enties refused to face realities that would have sent their bond ratings down and borrowing costs up. When the reality set in yeats later, they had crushing underfunded pension liabilities. Read David Zeiler's Retirement Nightmare: Underfunded Pensions Want to Chop Your Benefits by 60%. Eerie parallels to Executive Life Insurance Company of New York, but, without diminishing the significance of those payees' plight, in this case many more people affected. The "chronicles of actuarial over optimism" is a story for another day.
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There is a meaningful parallel between many retirees and injury victims who have suffered a full or partial loss of earning capacity. Both need an income stream to survive and can ill afford a lot of risk. To the extent that risk is taken it must be understood and measured to mitigated potential disrupt the income streams.. Annuities protect income streams. Today there are many types of annuities that can address different needs.
A structured settlement annuity is a customizable multiple payment stream annuity that can be a solution where there is a fxed and determinable need. It can also be used as a tool to provide a baseline level of income for a known part of a variable need (e.g. medical expenses have gone up and down for the last 5 years, but have not been less than $X per month) The vibrant secondary market in structured settlement payment rights is prima facie evidence that sophisticated investors, and institutions that buy securitizations of receivables from settlement purchasers value fixed payment streams due from structured settlement annuity issuers. Later this year an indexed structured settlement annuity product will be introduced by one of the players in the marketplace.
For prospective retirees there are numerous effective solutions for risk mitigation and the creation and/or protection of income streams with proper guidance from a licensed and credentialed advisor.
For more information please contact John Darer at 888-325-8640