Retirement planning: How to manage longevity risk and inflation in a volatile market

Financial professionals and their clients have recently been reminded that planning for retirement income means preparing for potential surges in inflation and market downturns, not just the risk of living longer. Where can financial professionals look for strategies to support their clients in these conditions? InvestmentNews Create spoke with Mike Downing, Chief Operating Officer at Athene, about opportunities for financial professionals to address the need for protection—and in some cases, the ongoing need for accumulation. 

InvestmentNews Create: How do increased market volatility and renewed inflation concerns affect financial professionals and clients as they plan for retirement? 

Mike Downing: Starting retirement in a down market means withdrawing from a shrinking nest egg. Someone who has a high proportion of their investments in equity-like instruments can endure a direct hit that can impact their nest egg for their entire retirement. For example, if that nest egg was just enough to create an expected lifetime income using the traditional 4% drawdown rule, in less than one year someone could go from a position of having sufficient retirement funds for the rest of their lives to falling short. So market volatility can create a lot of challenges, risks, and stress, and inflation worries only add to it.

InvestmentNews Create: What’s the current thinking about ways to use an annuity, specifically in a rising interest rate environment? 

Mike Downing: Laddering can be a great strategy. Annuities are offered in multiple lengths—three, five, seven, 10, even as long as 15 years. That allows pre-retirees/retirees a lot of flexibility as to how they create a ladder. For example, someone could ladder a series of five-year annuities, or a series of seven-years. 

These simpler vehicles and shorter durations can help assure clients that they have access to their principal throughout their retirement. 

InvestmentNews Create: We’re also hearing a lot about new forms of annuities, and it can be confusing. What should financial professionals know? 

Mike Downing: I think a lot of financial professionals don’t realize how versatile annuities are—it’s really impressive when you understand the different types. 

The most well-known annuity is the pure “safety” play, with a guaranteed rate of interest for a specified period. It provides absolute protection against volatility and allows the client to secure stable returns over time. To react to inflation over time, financial professionals should consider a laddering strategy, as we just discussed. 

The fixed indexed annuity can offer more growth potential with the cap or participation rate and still provide absolute protection against downside and market risk. It allows for greater growth potential for those who want to accumulate retirement savings and protect themselves from market volatility. 

We’re seeing fast growth of the registered index-linked annuity (RILA), which is attracting a younger customer base. This annuity allows a much broader range of outcomes and reaches clients on their own risk/return terms.  

In exchange for absorbing a percentage of any market loss, the customer benefits from interest credits that may equal or even exceed index gains. For example, if the customer agrees to take the first 10% of market losses and the index declines 5%, they would lose 5%. But if the index drops 15% or 20%, the loss is capped at 10%. RILAs balance significant growth potential with a level of protection from market risk. 

Really, annuities can be a bridge—a way for pre-retirees or retirees to transition from equities and accumulation into safety and principal protection. 

InvestmentNews Create: When looking at a client's overall retirement portfolio, generally what percentage should include annuity products? 

Mike Downing: How financial professionals use these products is evolving as new ones come to market. They should really evaluate the client’s retirement goals alongside the features of the annuity to make sure the option makes sense for the client’s long-term strategy. 

The old rule of thumb of allocating about 30% of a portfolio to protection still applies in the traditional annuity space. For these RILA products, though, that proportion could increase to as much as 60% because of their flexibility. They really start to approach equity-type upside and still can offer some protection on the downside. 

Clients really need their financial professional to review what works for them, because these new products are so different. Financial professionals who haven't really looked at annuities in a while should look at them again in the context of a world in which we see more market volatility and inflation. When they do so, they’re going to find real value because of the innovation that's been going on within the insurance industry in the last 10 years. 

This material has been prepared for informational purposes only, and is not intended to provide, and should not be relied on for, tax, legal or accounting advice. You should consult your own tax, legal and accounting advisors before engaging in any transaction.

Not affiliated with or endorsed by the Social Security Administration or any governmental agency. This material contains educational information regarding the availability and details surrounding the Social Security program and is not intended to promote any product or service offered by Athene. The information represents a general understanding of the Social Security Program and should not be considered personalized advice regarding Social Security, tax, or legal advice. Details of the Social Security Program are subject to change. A tax or legal advisor should be consulted prior to making any decision. Visit www.ssa.gov for additional details.

For financial professional use only. Not to be used with the offer or sale of annuities.

Guarantees provided by annuities are subject to the financial strength of the issuing insurance company. Guaranteed lifetime income is available through annuitization or the purchase of an optional income rider for a charge.

Indexed annuities are not stock market investments and do not directly participate in any stock or equity investments. Market indices may not include dividends paid on the underlying stocks, and therefore may not reflect the total return of the underlying stocks; neither an index nor any market-indexed annuity is comparable to a direct investment in the equity markets.

Athene Annuity and Life Company (61689), headquartered in West Des Moines, Iowa, and issuing annuities in 49 states (excluding NY) and D.C., and Athene Annuity & Life Assurance Company of New York (68039), headquartered in Pearl River, New York, and issuing annuities in New York, are not undertaking to provide investment advice for any individual or in any individual situation, and therefore nothing in this should be read as investment advice.

ATHENE ANNUITIES ARE PRODUCTS OF THE INSURANCE INDUSTRY AND NOT GUARANTEED BY ANY BANK NOR INSURED BY FDIC OR NCUA/NCUSIF. MAY LOSE VALUE. NO BANK/CREDIT UNION GUARANTEE. NOT A DEPOSIT. NOT INSURED BY ANY FEDERAL GOVERNMENT AGENCY. MAY ONLY BE OFFERED BY A LICENSED INSURANCE AGENT.