Failure to annuitize retirement assets increases number of households 'at risk' by nearly 10 percent
'High net-worth' households experience largest increase in National Retirement Risk Index
FOR IMMEDIATE RELEASE
October 26, 2010
Erica Lewis (614) 249-0184
Jeff Whetzel (614) 249-6354
Columbus, Ohio — Though many households focus on accumulating assets for retirement, it is equally important that they have a plan in place to help them get as much as possible out of those assets during retirement. New analysis of the National Retirement Risk Index (NRRI) by the Center for Retirement Research at Boston College, and sponsored by Nationwide Mutual Insurance Company, shows the percent of households ‘at risk’ for retirement jumps from 51 to 60 percent when they live off of the interest from their assets instead of purchasing an inflation-indexed annuity to provide a guaranteed stream of retirement income.
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 annuitize all of their financial assets. The new fact sheet examined what would happen if households did not purchase an annuity to provide lifelong income.
“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 Center Director Alicia H. Munnell. “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 annuitization assumption would have on the retirement outlook of American households in the Index.”
The full report is available at the Center for Retirement Research at Boston College.
The study examined two alternative scenarios to annuitization. The first alternative was that households drew down their assets at a rate of four percent 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 percent annually).
The results show that assuming households lived off the interest of their accumulated wealth had the biggest impact on the NRRI, increasing the percent ‘at risk’ from 51 percent to 60 percent. The percent ‘at risk’ increased from 51 to 53 percent for those that drew down their assets at a rate of four percent a year.
This research 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.
High net worth individuals especially ‘at risk’
The study also found that, when examining households by income level, individuals with a high-net worth were most impacted by not annuitizing their assets. The percent ‘at risk’ increased from 42 percent to 47 percent for those who drew down their assets at four percent a year and increased from 42 percent to 57 percent for those who lived off the interest of their assets (estimated at 1.9 percent 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. “It also highlights an opportunity for advisors to help educate clients about what options are available as they develop their retirement income strategy.”
Nationwide, based in Columbus, Ohio, is one of the largest and strongest diversified insurance and financial services organizations in the U.S. and is rated A+ by A.M. Best. The company provides a full range of personalized insurance and financial services, including auto insurance, motorcycle, boat, homeowners, life insurance, farm, commercial insurance, administrative services, annuities, mortgages, mutual funds, pensions, long-term savings plans and health and productivity services. For more information, visit www.nationwide.com.
Information About Annuities
An annuity is a long-term, tax-deferred investment designed for retirement that will fluctuate in value. It allows you to create a fixed or variable stream of income through a process called annuitization and also provides a variable rate of return based on the performance of the underlying investments.
But, as with most things in life, an annuity does have limitations. If you decide to take your money out early, you may face fees called surrender charges. Plus, if you're not yet 59½, you may also have to pay an additional 10% tax penalty on top of ordinary income taxes. A death benefit is available with most variable annuities and naturally, if you do take an early withdrawal, your death benefit and the cash value of the annuity contract will be reduced.
You should also know that an annuity contains guarantees and protections that are subject to the issuing insurance company’s ability to pay for them. But these guarantees don’t apply to any variable accounts that are subject to investment risk, including possible loss of your principal.
An annuity is a contract between you and an insurance company and it’s sold by prospectus. While it may take some time, you should read these documents. They describe risk factors, fees and charges that may apply to you. Variable annuities have fees and charges that include mortality and expense, administrative fees, contract fees, and the expense of the underlying investment options.
Variable annuity and variable life insurance products are issued by Nationwide Life Insurance Company or Nationwide Life and Annuity Insurance Company, Columbus, Ohio. The general distributor is Nationwide Investment Services Corporation, member FINRA. In MI only: Nationwide Investment Svcs. Corporation.
Nationwide, the Nationwide framemark, and On Your Side are service marks of Nationwide Mutual Insurance Company.
Brad Davis is a registered representative of Nationwide Investment Services Corporation, member FINRA. In MI only: Nationwide Investment Svcs. Corporation.