Jenna Dagenhart:

Hello, and welcome to this Asset TV Retirement Income Masterclass. As people live longer, they're faced with the challenge of making sure that their finances will last longer, too. Today, we'll cover ways to turn retirement savings into income, whether the 4% rule still is a safe strategy, and much more. Joining us now, it's an honor to introduce our panelists, Michael Sosnowski, director at Transamerica Advanced Markets, Mallory Padzer, practice management presenter at MassMutual Strategic Distributors, and Michael De Feo, head of Defined Contribution Distribution at Allianz Life Insurance Company of North America. Well, everyone, thank you very much for being with us today, and Mike kicking us off here. When it comes to retirement income planning, the most common question is where do I start? So, where do we start?

MICHAEL SOSNOWSKI:

Well, thanks, Jenna. That's a great question. And figuring out how to turn your savings into a sustainable lifetime income stream, well, it can seem like an overwhelming task, so much so that it could be difficult to really figure out where to even begin. So, one place to start is really thinking about the overall goal. What are we trying to accomplish? We've been accumulating assets, our whole working careers, we've been saving, we've been investing, we've been preparing for our golden years, preparing for that retirement. And now that they come where we're now responsible for turning that nest egg, that lump sum we've saved into a lifetime of paychecks. Now, there's a professor of retirement income at the American College, and he uses this mountain climbing analogy that I like to share, because I think it's really, well, it really hits home, because he equates our accumulation phase of life to climbing up the mountain, and going down the mountain is really our distribution phase.

And what he emphasizes is that the goal of climbing a mountain is not just to make it to the top, we need to figure out the safest way to get back down. And getting down the mountain, now, that could be the most risky part of mountain climbing. So, we spent our whole working years planning, and accumulating, climbing up that mountain. But when we're finally in retirement, many of us, we don't really have a plan to come down that mountain. We don't really know how to get into that distribution phase. We have no plan for maximizing our social security benefits, or determining which Medicare plan is the best for us, or really how to develop that paycheck in retirement. We have a hard time identifying what assets should we spend down first, what are we going to do to provide ourselves with that dependable income stream?

So, when it comes to retirement income, a good place to start is, well, at the beginning. And what I mean by that is there's this recent survey by the American College, and what they found out is that less than 20% of participants in that survey could actually pass a retirement income literacy test. And unfortunately, a factor that makes this process so much more difficult is that it's not a one size fits all solution. Everybody's different. Everyone's circumstance is unique, and what it really comes down to is a process. We need to figure out how much income we need to match our desired lifestyle, and that's really the main goal. What is that desired lifestyle? What will our expected expenses look like in retirement, whether they're essential expenses, or those fun expenses, the discretionary ones? And what sources do we have that we can satisfy these expenses?

So, if we look at income when it comes to income, most income will come from retirement accounts, or pensions. Now, for most of us, income is going to come from our IRA, right? Most people are going to roll over from their work sponsored plan, right? Those defined contribution plans into that IRA. Usually when they retire, usually when they separate from the employer. In fact, it stands now that about two thirds of private sector workers have access to a defined contribution plan. So, that 401K, which is a defined contribution plan, is the largest retirement account out there. And so those accounts usually rolled into the IRA. So, IRA is usually the main source. Now, another type of retirement account, there's the defined benefit plan, or the pension, but unfortunately that's going the away at the dinosaur. Pension plans are disappearing. Less than 15% of private sector workers actually have access to a pension.

So, for most, it's going to come from our IRA, and for most it's going to come from that retirement savings, which is not a guaranteed source. So, we have IRAs, we have retirement accounts, we have social security, the number one entitlement program in the US. And really the reason being is because most individuals rely on social security, they rely on that guaranteed payment payment every month. Now, for many of us, though, that's our only source of guaranteed money, just social security. And unfortunately, social security doesn't replace a whole pre-retirement paycheck. So, speaking of pre-retirement paychecks, a lot of individuals may go back to work, part-time work. And it's not just really to generate that steady source of income, but you get that social interaction. And who knows, it might be fun to go back to work in a field that maybe we didn't have an opportunity to work in before our actual working careers.

So, the thing though, with working in retirement is we can't rely on it. Many plan on working well into their golden years, maybe at that fun job they always wanted, but health problems can cause an earlier than expected retirement, so we can't count on that. Some individuals may have passive income, right? Passive from the different investments they have. They may have rental income coming in, maybe interest income, maybe dividend income. But what many individuals should look at, at least consider, is the annuity. Because if our only source of guaranteed income is social security, and it only replaces a portion of pre-retirement income where the status is about 40%, only 40% of pre-retirement income, well, the annuity could be huge, especially if we're used to monthly income payments throughout those working careers, those decades of work, and it's social security with that annuity that can be that replacement, that could be that replacement in the paycheck in our retirement years.

And so what the idea here is, is to really match those guaranteed sources of income with those essential expenses, and those expenses that maybe, yeah you can't live without. We want to make sure we have that money coming in, that mailbox money, those expenses that are like food, housing, utilities, healthcare, taxes, right? Well, I guess we could live without taxes, but they aren't going anywhere. But we can match those expenses with those social security payments, with those annuity payments. So, I think a really good start to any retirement income plan is think about our lifestyle goals, and then really we could create a budget from there, identify those sources of income, look at our essential expenses, and then from there we could look at the discretionary ones, and see how everything matches up, so that way we continue our desired lifestyle.

Jenna Dagenhart:

And it seems like interest in guaranteed lifetime income is growing, but plan participants went more than just a reliable stream of monthly income. Michael, what else are they looking for?

Mike De Feo:

Yeah, thanks, Jenna. I think that's an important question here because as I travel the country talking to folks about retirement income solutions, I think what we're finding is more, and more people are wanting personalization because life happens, right? Every individual has different circumstances that they're dealing with. From a work perspective, individuals might be changing jobs more frequently. They might be working into retirement, or working longer. There's healthcare concerns. There's the changing demographics, or dynamics of family life, divorces, et cetera, or just aging, and living longer, and the cost associated with that. So, people are really wanting to pursue solutions, or have access to solutions that give them flexibility to deal with these life issues. And I think some of the enhancements in product designs that are coming to market now, that are allowing individuals to deal with their own circumstances are new, and unique. And so these solutions are not your parents' annuities, so to speak, as we like to say.

And to address this, I think some of the concerns that individuals might have, or that should be built into a product solution, will it protect against market volatility? Because in retirement, those market shocks really can have a dramatic effect. Do they allow for increasing income in retirement? Are they flexible? Do they allow an individual to turn on features that they might want, or don't want, and customize them to their own individual needs? Are the assets in them accessible, or are they stuck? I think a huge hurdle in the past with a lot of these strategies is that they were too narrowly focused on solving for longevity. And most of them did a good job of that. But what individuals sacrificed, then, was a lot of flexibility, and access to those funds that were locked up into those products. So, there's new enhanced products that are addressing those concerns.

And I think finally, portability, right? We've heard a lot about, I mentioned earlier, people are jumping from job to job more frequently, plan sponsors have issues with portability. They don't want to necessarily be locked into a solution that marries them to a given record keeper. And so portability at the plan level, and at the individual, or personal level is critical. People need to be able to take these solutions with them if they move from job to job, and keep those accumulated benefits. And with more recent plan design, they're being able to do that. And then finally, I think, and this is probably the biggest sort of hurdle that we've had to overcome in the market, is they want all of this at a price that they're used to having access to in a retirement plan. So, it has to be priced appropriately.

Jenna Dagenhart:

And building off of Mike's analogy, which I loved about going up the mountain, but then also coming down the mountain in retirement, it sounds like getting down the mountain can be pretty risky, and full of a lot of uncertainties. So, Mallory, what are some of the key risks when planning for retirement?

Mallory Padzer:

Yeah, absolutely. I mean, we really believe that there are kind of four primary areas of risk when you're planning for retirement. First would be the sequence of returns. When you retire matters just as much as the percentage of income that you're taking. In other words, the order, and timing of those returns can really have a profound impact on how long your retirement savings will last. Someone who experiences declines in the early stages of taking income may run out of money sooner than someone who does not. It's important to explain that to clients as well. Second, they both mentioned it, but longevity risk, it's a fact. People are living longer, that means they're working longer. It means their retirement is going to be longer. So, how can we ensure that their money lasts over the course of not only their working years, but into the years after that as well.

Third one of them mentioned it, long-term care, right? The problem with long-term care, or health costs, they increase as you enter into the retirement years, but a lot of people don't think about those things until something happens to someone close to them like a friend, or family member. So, long-term care costs, whether that's entering a nursing home, or in-home care, or chronic illness, it really needs to be something to be considered when you're talking about the overall financial plan for clients. And then finally, inflation, right? Inflation over the last few years has gone up, and consumers should really expect that that's going to continue throughout the remainder of their lifetime. So, it is a risk that they have to consider when they're talking about their financial plan with their financial advisor.

Jenna Dagenhart:

Certainly. And Mike, what would you say are some of the risks to the success of a retirement income plan?

Mike De Feo:

Yeah, I'm going to underscore some of the stuff that Mallory has already said, too, and that I'm going to stress some of the importance. And I mentioned it earlier in my earlier points that the protection market volatility. More recently, I think we saw most recently due to the volatility of the last two, or three years, that really have a dramatic effect on individual's retirement savings. And so, having the ability to have some protected income sources that protect against that market. Volatility, I think, is critical. Mallory said, protection against inflation. So, that if we had a set stream of income that is a stated income stream, that doesn't change over time. The biggest, or one of the biggest drags on it is always going to be the effect of purchasing power risk, and the effects of inflation. So, we need to have something that has the ability to have income, or that income stream grow, or continue to grow in retirement.

Earlier I mentioned flexibility, and turning features on, and off. And solutions in the past, many of them were very rigid, and restrictive, and required people to sort of declare, and, or state when they want to take income. I think now we want to give individuals choice as to when they turn income streams on, or off, or when they even take them, right? If someone's spouse has a pension, you might not need the same level of guaranteed income at any given time. And so we need to have products that allow for individuals to personalize them. And I think accessibility, we can't discount that at all, right? People don't want to be locked into a solution that restricts their ability to get at their money, and might require them to pay an additional fee, or surrender charge. That's not what people are used to in retirement plan savings vehicles, and, or in products like this.

And so they want to be able to get access to their money when they need it, if a health issue comes up, or if a life issue happens, they want to be able to get at the money that they've saved in any one of their investment vehicles. And then finally, cost, right? These products have to be delivered at a cost that's similar to other investment strategies that people are using in their normal portfolio allocation. And historically, these types of guaranteed income solutions have been priced significantly higher in many instances, and I think that that has kept people away from them. And portability, I mentioned that earlier. And I think the importance here is that whether a person stays in a plan, or moves to an IRA, they should be able to keep all the accumulated benefits, and all the function, and features associated with a product, or strategy, whether they're in plan, or out of plan.

Jenna Dagenhart:

Mike, anything that you would like to add to that, or some of the risks around the success of a retirement plan?

MICHAEL SOSNOWSKI:

Yeah, I'm going to really piggyback what Mallory had mentioned, what Michael had mentioned, only because there are so many risks out there that can upend, really, any successfully planned strategy, or retirement income plan that you have out there. And it's really these risks that are creating sleepless nights for individuals. They created all this anxiety for retirees, and pre-retirees. There's a recent survey by Charles Schwab, and what they did is they asked what pre-retirees worry about as retirement approaches. And the respondents were 72% said that they were worried about running out of money. 60% said they were very concerned about not getting a regular paycheck in retirement. And then it was about two thirds that said they're just overwhelmed. They're overwhelmed not being able to possibly maintain at least a current lifestyle, or quality of life. So, a lot of anxiety out there with these risks.

And I would say that the main risk out there, or one that seems to generate a lot of fear is that risk of outliving your assets, that longevity risk. I mean, imagine the shock of receiving, and you're used to getting that paycheck each, and every month from that portfolio, and you're well into retirement into your golden years, and then one day the check just disappears. It just stops. And this is where we really need to think about guaranteed income, and how an annuity can really provide that comfort by basically mitigating this anxiety. So, with an annuity, at least we know that a portion of the portfolio is going to be guaranteed to generate that income, and we know it's going to be an income stream that it won't go down, it won't run out. It's going to be there for the rest of your life, and it may even go up, which is fantastic as far as mitigating inflation.

So, that's a risk. Another risk is, Mallory really hit on this, but that sequence of returns risk, right? Those negative returns, that could have a huge impact on the success of your portfolio, of your income strategy, or taking distributions in a down market. As our portfolio is losing value, now we have to sell more investments to raise more money just to be back at the level where we were before. So, that's not only going to drain our savings more quickly, but it's going to leave us with less, or fewer assets to generate growth, and returns to maybe get back to where we once were. So, just with that bad sequence of returns can have just a negative, and real lasting impact on portfolios, and really threaten the ability to make that retirement savings last for the rest of your life. And so again, looking at the annuity, we have to consider annuity with the withdrawal benefit.

Those guaranteed income products provide that predictable, reliable, sustainable income stream that it doesn't really matter what happens with the portfolio of the annuity, because we're going to have that lifetime income, even if that portfolio were to go down to zero. So, that's one of the important pieces of a portfolio is having that annuity. And plus, what it's going to do, too, is that when you have a guaranteed income stream, it reduces the need for portfolio management skills, which could be greatly appreciated as we get older as we age. So, annuity could be huge for longevity, could be huge for sequence of returns, could be huge for inflation risk, and that's that risk of losing our purchasing power, our buying power. This is going to force us to maybe reduce consumption, reduce buying things that we normally buy, and in turn, it's going to impact our standard of living.

So, we need that portfolio, and that distribution that will keep up with inflation. And Mallory mentioned healthcare risks that's at risk of these unpredictable conditions we may come across that could create uncontrollable costs. And then of course, we have taxes. This one's often overlooked, because people usually just pay their taxes without necessarily planning, but taxes could actually be the largest expense somebody has in retirement. And we just know that the more money that goes to taxes just means that the less is going to go to us in our retirement. It's not what you earn, it's what you keep. So, we want to make sure when it comes to taxes, and maybe mitigating some of these taxes that we use, the different accounts that we may have. And what I'm talking about here is really asset location. So, we want to make sure assets are really spread across different investments that are in accounts like taxable accounts, maybe tax deferred accounts, and then maybe look at tax-free accounts like the Roth IRA.

And what this will help us do is just maybe keep us in a certain threshold so that way we keep taxable income below what could be the next bracket, and that, in turn, will help us keep our capital gains taxes at a certain rate. So, if we incorporate a tax-free, and tax efficient, and tax favorable withdrawal strategy, well, according to Fidelity, yeah, Fidelity, what an individual could do is actually reduce their taxes in retirement by as much as 40% just by a tax efficient withdrawal strategy. And then according to Vanguard, you could add 110 basis points to a portfolio's return without adding any additional risk. So, quick recap. I know it's a lot what Michael said, what Mallory said, but a couple of those common risks out there are longevity risks, sequence of returns risk, inflation risk, healthcare risk, taxes risk, and all of them create anxiety.

Mike De Feo:

Yeah, I'd like to add something, too. I think what we're trying to do is provide ways for people to maintain their dignity in retirement. We want people to be able to deal with life's issues throughout the retirement, and have the flexibility to do that.

Jenna Dagenhart:

That's a great way of putting it. Mallory, I saw you nodding your head there. Anything you'd add?

Mallory Padzer:

Yeah, I was just going to say, I think the other thing to note is that advisors should really be talking about all of these things with their clients from the very beginning, right? There needs to be some type of process in place where you're not just talking about, here's the accumulation stage, I'm going to grow your money. You really should be talking about those things that could come in the future as well. So, when we think about what a financial plan overall looks like, not just what the risks are, but we, I'll use the acronym, I call it GAPP, right? GAPP. So, growth, someone else mentioned access, right? Predictable income, and protection, and figure out there's different solutions that fit into those areas. But I think that those things really need to be talked about from the very beginning, from the very first meeting, so that they understand as a whole, they're planning for the long term, not just the short term.

Jenna Dagenhart:

Yeah, I love that GAPP, too. That's a nice way to remember it. Mallory, how do advisors start talking with them about their income stage?

Mallory Padzer:

Yeah, I think it's, again, it needs to be a part of their process. Financial planning in general has changed. You're not just the person that's picking stocks for your clients anymore. You're the person that they're going to for potentially learning about life insurance, and long-term care, and annuities. And I always say there's a lot of hope in our industry, but hope isn't a strategy. You can't hope your clients are going to walk in your office, and say, "What's the latest, and greatest annuity today?" You have to really focus on putting that plan in place. So, I tell people, utilize that GAPP acronym when we're talking about things for growth. We're talking about maybe ETFs, mutual funds, stocks, and highlighting the fact that those solutions are really built to grow the client's money.

And then when we're talking about access, money markets, cash, savings accounts, checkings account, checking accounts, excuse me, predictable income, that's that P, GAP, predictable income, 401Ks, social security pensions, if there are any left in this world, and those annuities that we're mentioning. And then the last part of it would be protection, cash value, life insurance, long-term care planning, things like that. So, I think by utilizing that acronym, and really saying, here's what I'm here for, this is everything I can do for you, it helps advisors facilitate that conversation, and really build that relationship for the longterm.

Jenna Dagenhart:

So, Mike, what are some different approaches to turning retirement savings into retirement income?

MICHAEL SOSNOWSKI:

Well, thanks, Jenna. That's another really good question with a wad of answers. And it's really, as Mallory had mentioned, it's really that holistic approach to planning that comes into play. And when we look at, really, turning that lump sum into income, there's a number of different ideas, and different strategies out there. And what I'm going to focus on is really four, four of the more common approaches, and the most common approach that most individuals use, most retirees use is just a systematic withdrawal. And basically it's a predetermined periodic withdrawal, and it just comes out of their total portfolio. So, their portfolio of investments, their stocks, bonds, mutual funds, we just take a withdrawal. And this could either be a percentage of what is remaining portfolio value that comes out each year, or it may be like a set dollar amount that could be adjusted for inflation each year.

And what the retiree, and the planner really need to focus on is that we want to make sure the withdrawal is safe, and sustainable. We want to make sure it's a sustainable spending rate, so that way if something does happen, we know that this withdrawal will help their assets, and really their wealth lasts for the rest of their life. So, systematic approach, it's pretty easy to set up. And I think that's the reason why most individuals use that approach. But it may be difficult to maintain, especially throughout an entire retirement where our retirement could be longer than our working career. As a society, we have longevity, we're living longer than we ever have been, and this generation could be the longest generation in retirement than any previous generation before us. So, what we want to make sure is that we are familiar with, and we are prepared for any type of unexpected expenses, or market volatility.

So, because of that, just that systematic withdrawal, we may need a slight variation. And a variation approach is called a variable withdrawal strategy. And what this is, is just a strategy allows the retiree to change that distribution, and it's really going to be a change based off of market performance. So, it's a strategy where there are guardrails, right? Individuals will have guardrails, or really built in calculations, so that way they can adjust their spending rate maybe up, maybe down really depending on the performance of the portfolio. And that way it can be beneficial if we do experience something like what could be maybe a significant downturn. So, has flexibility, keeping the spending from maybe drifting too far from those initial levels, but it's those guardrails that that can really help us out. And then another approach individuals will look at is what's called a bucket strategy.

And basically what we use is basically a bucket for each defined period in retirement. So, it's a bucket based off of a time period where we're going to use somebody's risk tolerance, and time horizon to kind of figure out what those buckets are going to look like. So, basically what we do, we're separating assets into these three buckets, and they're going to be really aligned to fund different periods of retirement. So, an example would be maybe we have buckets that are divided into one for current expenses, like expenses that come up in the next couple years, one for expenses that are maybe about a decade out, and then one for expenses that are much later down the road. And what we're going to look at is different assets for those different buckets, or those different time horizons. So, that first bucket, that now bucket, we want to be invested in safe investments, those liquid investments, because we want to be prepared for current expenses, and maybe emergencies.

And then that second bucket, or really the soon bucket, we're going to have more balanced approach. And the reason being is because that pot of money, we're not going to use that for a couple of years. And then the last bucket, third bucket, well, that's where we could be a little bit more riskier. Maybe we're weighted heavily in equities. Reason being we're not using that money anytime soon, so we can write out market volatility, and we could grow that bucket. And then as we go through this, as go through that first bucket, and we start drawing down the savings, then we're going to shift that allocation so we become more conservative, basically drawing down one bucket, and replenishing it with those other buckets. So, that's the bucket strategy. And then the other one that's out there is the floor, and upside, which is used, and basically objective here, match those essential expenses with guaranteed sources of income.

That's the four. And then discretionary expenses, we're going to match with an upside portfolio. So, that's the upside. So, the four were funded with guaranteed sources of income. This is pensions, social security, annuities, upside, we could be more risky. Maybe we'll go in something that has a greater opportunity for growth. So, as a recap, number of different strategies out there, not a one size fits all strategy, we need that holistic approach to planning, but I would say the most utilized are really systematic withdrawal. That variable withdrawal rate is used quite a bit for the guardrails, the bucket strategy, and then that floor, and upside.

Jenna Dagenhart:

And circling back to the longevity conversation that everyone's touched on, we know that people are living longer according to the National Institute of Health, and that means that their retirement years may account for up to a third of their life. Mallory, how do financial professionals help their clients plan for this potentially 30 year retirement?

Mallory Padzer:

Yeah, it's a conversation that definitely needs to be happening. We've all made mention to it as of right now, but we used to talk about a 20 year retirement that's looking more like a 30, 35, 40 year retirement. And when we think about how clients view retirement, we also have to think about the thought process behind it. So, when you think about how your brain works. The left side of your brain is kind of the analytical side, like the money, and the numbers, and the right side is more visually focused, and we kind of have to put them together when we're looking to explain longevity risk to clients. So, at MassMutual, we talk a lot about a four box strategy. So, imagine you have four boxes, and in the top left-hand corner, you kind of have your necessary expenses, right? Your housing, your utilities, healthcare, all that stuff.

And then directly across from it, you have those predictable sources of income we talked about. Social security, 401Ks, annuities. Underneath that necessary box, you have your discretionary spending. So, travel, shopping, anything else that you might want to do in retirement, but it's not absolutely necessary for your survival. And across from that you have kind of those growth strategies, right? CDs, and stocks, and bonds, and all of that. And what we find is when advisors kind of simplify it into this four box strategy, it gives the client the opportunity to think about their retirement, not just from analytical number side, but a visual side, too. So, it helps them comprehend it a little more understandably. And that's kind of just the start of the conversation, but we find that starting the conversation that way really helps them envision what they want it to look like in retirement.

Jenna Dagenhart:

And Michael, one objection to guaranteed lifetime income products in the past has been that participants simply aren't asking for it. Is that still true?

Mike De Feo:

Yeah, I think it's really hard to continue to make that argument, right? You'll notice it on TV now. There are many more ads addressing this issue head on, and so people are much more aware. And I think more specifically, we at Allianz, we do a quarterly market perception survey. And the most recent survey we found, first of all, 68, when you ask about features, and functionalities of lifetime income products, and you ask about those functions, and features specifically, you get some interesting responses that sort of indicate that people do want it, but they might not know what they're asking for, or that they need to ask for something specific. So, we found that 68% of participants want to have information given to them about an annuity through their employer sponsored savings plan. 67% said that they would likely allocate to a strategy if it was offered.

I think most interestingly, 77% of the participants said that if a lifetime income strategy was offered in their plan, it might make them more loyal to that employer. And I think that's an interesting take. I mentioned earlier that people are staying at jobs for less, and less time, and that there are hiring issues in the marketplace. This could be a retention strategy if people see it as a meaningful benefit. And then we've run that survey in each of the last three years, and in each of those years, we've seen interest in some of these features, and functionality increase year over year. More specifically, I think when you ask about interest in guaranteed income sources, clearly, participants are beginning to sense, and say that they need other sources of guaranteed income other than social security.

So, 90% of the response in our most recent survey indicated that they recognize that they need access to another guaranteed source of income, not just social security. And I think these are all reasons that advisors can add value to a plan. Advisors, and consultants have an important part of this process in terms of helping people realize what they might have access to, and how to use it. And I think another thing to consider here are the delivery methods. It's another way for advisors to increase their value proposition in the marketplace by making participants, and plan sponsors aware of these features, and functionality.

Jenna Dagenhart:

Yeah, I think the findings from those surveys are really so enlightening hearing what people are saying, what they're thinking. And MassMutual has sponsored both consumer, and advisor surveys about fixed annuities for the last two years. Mallory, could you tell us a little bit more about what goes into these surveys?

Mallory Padzer:

Yes, absolutely. So, we really focused on getting these surveys together in an effort to not only understand how financial advisors are talking about these products, but what consumers are really looking to hear about. And the results were kind of staggering in some instances. 47% of people that were surveyed did not know anything about the inverse relationship bonds have with interest rates. Only 20% of those surveyed could even identify where interest rates were today. 40% could not even identify a fixed annuity at all. But the really interesting fact was that 65% of the consumers, excuse me, surveyed, said that they would want their financial advisor to talk about fixed annuities with them. So, what that tells us is that there's some type of gap there between what clients are interested in learning about, and what advisors are bringing to them from an educational standpoint.

Jenna Dagenhart:

And to follow up on that, Mallory, what are some of the key findings, and was there a difference between 2022 to 2023?

Mallory Padzer:

Sure. So, overall, the good news is that confidence in the market as a whole increased year over year. So, that was a big positive to see. But as I mentioned, what we're seeing is that even though the consumers couldn't identify annuities, what we have found in both instances, both years was that there's a desire to learn more. And one of the interesting facts from it was that 85% of consumers who were surveyed said that if they had discussed annuities as a whole extensively with their advisor, they'd be highly likely to recommend them to family, or friends. When those same people were surveyed about, if their advisor did not talk about annuities as a whole, that number drops to 58% being willing to refer their advisor to family, or friends. So, again, what that tells me is that there's a gap from an educational standpoint, but it also tells me that advisors should be talking about this not only in an effort to help their clients, but in an effort to help even more clients out there, and get those referrals as well.

Jenna Dagenhart:

And we've heard a lot historically about the 4% rule. Mike, do you think that the 4% rule is still a safe retirement income strategy?

MICHAEL SOSNOWSKI:

Well, that's a good question, Jenna. And I think, unfortunately, the answer is maybe. It really depends on where you're drawing that 4% from. Just quick background, right? The 4% rule, it's long been that popular rule of thumb for retirees, and that was really thanks to William Bengan, right? And as we all know, what we do here is we're just going to take that predetermined withdrawal from our portfolio. And I say that we all know about it, but the reality is that most individuals aren't familiar with the 4% withdrawal, or the 4% rule. There was a recent survey by the American College where they found out that only three out of 10 individuals understood what is meant by a 4% withdrawal. So, back in 1994, William Bengan be suggested that a person age 60 to 65, 50/50 portfolio allocation, basically, they could take a withdrawal rate of 4% of that initial principle, and they can adjust it for inflation every year going forward, and they'd be safe. They'd have a distribution that would last for 30 years.

So, we've got a million dollar portfolio, we should be able to take 4% of that, and generate 40,000 a year. And that 40,000 is going to be adjusted every year, and that's going to last for 30 years. The problem here is that there's just so much unknown out there. What are the unpredictable social, economic, or market conditions that we could experience over that 20, 25, 30 year period? It's these different unknowns that really could require adjustments to that withdrawal. So, what we want to look at is how reliant are we on our investment portfolio for that income? Because the less guaranteed sources of income that we have coming in, then the more reliant we are on those investments. And if we're too reliant on our investments, then some of those outside risks that we already talked about, it could be devastating, because as reliance on that investment portfolio for income really increases, so does the sensitivity for market volatility for, we talked about sequences of turns risk, and of course the number one fear, the longevity, right?

The longevity of that withdrawal strategy. So, if we don't have protected sources of income, then a higher withdrawal rate out of that investment portfolio means a greater reliance on that investment portfolio. And we mentioned earlier, we usually have social security, and pensions as really our only sources of that guaranteed income. And as we mentioned earlier, most don't have a pension. So, we just have that social security as a guaranteed source of income. And that's where, again, the annuities discussion really has to come into play, because that annuity can provide that protected withdrawal that essentially can lower the withdrawal requirement from those other assets, especially if we don't have any other guaranteed sources of income if the rest of the portfolio is not protected.

So, essentially what you could do is create an income stream with less assets, meaning that you can insulate those other investments in those managed money accounts, and we can really insulate them from fluctuations. So, an annuity, especially some of the annuities that are out in the marketplace right now where interest rate environment, Transamerica, we have that 8% withdrawal rate on one of our annuities. But what that does is that helps us lower that reliance on the investment portfolio to generate our income. So, long story short, a 4% withdrawal could still work, but if we take advantage of some of the income guarantees from the annuity marketplace that we're currently in, well, we can reduce some of the withdrawal stress placed on really the rest of that investment portfolio.

Jenna Dagenhart:

And Michael, another objection has been that participants don't take advantage of guaranteed lifetime income options when they're offered. What are some of the barriers to participant adoption here?

Mike De Feo:

Yeah, participant in action is not necessarily a challenge that's unique to guaranteed income sources. That's why we have features, and plans like auto enrollment, and auto escalation. When you think about how to add income, though, to a participant's portfolio, we need to try, and do it seamlessly. And I think that the easier we make it for that participant to adopt it, the more likely that they are going to utilize the benefit in a plan. If we create friction where we're actually asking them to do something, we're more likely to lose that participant at that point. And secondly, I mentioned earlier, and we talked about it extensively through our discussion so far, all of us, is that we need to provide for personalization. We need to allow individual circumstances to be addressed, and the products need to be flexible enough to adapt, and be available to meet individual needs.

If we try, and solve for an average participant, you actually solve for no one, because there is really no one that is just average, right? No one wants to be called average. No one is planning for an average retirement. We all have our own individual dreams, and circumstances, and we want a product that's going to be able to address that. And if we want to have a positive impact on individual participants, then we need to provide for that personalization. And when in my discussions around the country with advisors, and consultants, more, and more of them are becoming convinced that, that individual personalization is really going to drive the adoption of these types of strategies, and how they're delivered in plans, or in accounts, we need to make solutions available that are flexible.

They need to be, how are participants going to get access, and utilize these strategies correctly? How can that be delivered in a scalable way? Managed accounts, for example, is a very scalable way to deliver advice to a broad swath of planned participants, and to have some level of individualization. So, clearly there's going to be some advancements in how these products are adopted, and delivered in the market, and to make them more available, not just to the affluent, and wealthy clients, but to all participants.

Jenna Dagenhart:

So, Mallory, education appears to be an issue. Do you have any suggestions for advisors on how to fill this knowledge gap?

Mallory Padzer:

Yeah, absolutely. I would say, it's going to sound really silly, but have the conversations, right? I mean, what comes down to is when we look back at the study, for example, and if clients don't even have a basic understanding of the interest rate environment, we don't want those clients making decisions that could be risky to their portfolios, or their long-term goals. But without that education piece, they may be prone to doing that. So, I think, again, it's really important to set the stage from the very first meeting you have with a client. And if you already have a client, and you've had that first meeting, start now. Because the reality is they're not going to learn about sequence of return risk from you. They might learn about it on the internet, or somewhere else. We really need to focus on educating clients around sequence of returns, risk, inflation risk, market volatility, long-term care. So, we really just need to get vocal, and make sure that we're educating those clients either from the very first meeting, or starting today for sure.

Jenna Dagenhart:

And Mike, how was the retirement income industry, how has it evolved in the past few years to offer better solutions?

MICHAEL SOSNOWSKI:

Well, it's really evolved, I think, for the better for the retiree, and the pre-retiree, mostly because there's been really a shift, a shift in the whole retirement landscape. And what I mean by that is if you were a 20th century retiree, you had really an opportunity to receive healthcare from your employer. You had guaranteed income from your employer, basically your employer took care of a lot of the concerns, risk, and anxieties that you had as a retiree. Well, there's been a shift, a shift in that retirement landscape to where now it's sometimes referred to as a yo-yo retirement, yo-yo, not referring to the ups, and downs of the market, but yo-yo meaning you're on your own, right? So, instead of relying on that employer for healthcare for income, you are putting money away, you are accumulating this wealth, you are growing your nest egg, and now you are generating income out of there.

And so I believe where the marketplace has really changed, and really evolved is seeing just that, is that there's so much responsibility on that pre-retiree, or retiree to generate their own income sources that we need something to help them. And that's where I think the insurance industry has evolved from, what was it? Just a basic annuity contract that may not even... If we look at the evolution of just the annuity itself, we had deferred annuities, and we had immediate annuities. Deferred annuities, they had, at times, benefits, but never a benefit that would guarantee a lifetime of income. Back in the day they had return of principal guarantees. And you could either go with that, or you could lose a lot of flexibility, and go with an immediate annuity. Now we have deferred annuities that have really evolved into not only allowing different investments, but more importantly different kind of guaranteed income sources.

We had the guaranteed minimum income benefit for a while. We had the guaranteed minimum withdrawal benefit that adds flexibility. But I would say probably in the end of the middle to the end of the 2000s, there was really an arms race with annuities. Arms race being what benefit could we provide out there, and how could we make our benefit better for the end consumer where our benefit's better than the other guy's benefit? So, I think because of this opportunity to identify that there's a need out there, that individuals need help, that they do have a lot of responsibility, I think the industry is evolved to provide, really, the protection that individuals are looking for. And I think Michael alluded to this before, where individuals want an annuity. They basically want guaranteed income. They just don't necessarily know exactly what an annuity is, or how an annuity works.

But more, and more surveys, more, and more research out there points to the direction that individuals want at least a portion of their portfolio protected. They want that mailbox money, they want that guaranteed source of income. They want to have those nights where they can rest easy, not worry about volatility in the market, not worry about inflation risks, not worry about all those things out there, and just know that when they go to their mailbox, they're going to see a check.

Mike De Feo:

Jenna, let me add, too, there's been some other things, factors that have caused the market to change dramatically relatively quickly. For example, secure 1.0. In 2019, there was legislative change, legislative change that allowed for annuities to be offered in plan. That safe harbor was a dramatic change. And the market, because of that, began to adapt, and adapt quickly to being able to offer products in plan, but having them offered in plan, you still had technological gaps. Record keepers don't know how to keep track of annuities, and things like that. So, there are now solutions where you're solving for that. Through middleware, those connectivity issues, and client individual data that is necessary to keep individual contracts, and make them portable at the individual level. We're addressing those issues now through the use of better technology. And then because of that, because of the legislative relief, and because of the technological advances, we've had some dramatic product advances that allow for that personalization that I've been describing.

Jenna Dagenhart:

And in addition to people not always knowing what exactly annuities are, as you mentioned earlier, Mike, a lot of times there's also confusion about where they fit within a portfolio. So, tying everything together that we've been talking about today, Mallory, how do you think about fixed annuities, and income annuities as part of a client portfolio?

Mallory Padzer:

Absolutely. I think there's a misconception in the industry. It has been for a long time. No one is ever going to tell you to put all of your money into an annuity, right? It's meant to be an additive to the rest of your portfolio. So, when we think of fixed products, if we go back to that GAPP acronym I used, that provides for a variety of things from the growth perspective, you can have a guaranteed rate of return, which is really helpful for not only your growing money, but also for peace of mind. When you think about access, you have access to a portion of those funds. So, it gives the client some flexibility there, predictable income, some of those annuities on the fixed side allow for an income stream for your lifetime, your spouse's lifetime, or whatever number of years you may choose. And then protection, a fixed annuity really serves as kind of an anchor in the portfolio.

And then when we're talking about income annuities, again, kind of going back to that four box strategy I talked about, we talked about necessary expenses, and we talked about discretionary expenses, and we believe that in the middle of that, there's kind of a gap there. And that's where income annuities can really fit in to provide an additional source of guaranteed income because your necessary expenses where you have your 401K, or social security, that might cover some of those necessary expenses, but if you want to go on a trip to Hawaii next year, you might only be able to cover a portion of that, right? So, the annuity is meant to be additive in the portfolio so that you don't miss out on those discretionary opportunities. And also, again, someone mentioned earlier, I don't remember offhand who, but about peace of mind, and about dignity, and making sure that you're combating those risks that we discussed in the beginning of this, and really having a source of income to make sure that you're meeting not only your needs, but that discretionary want as well.

Jenna Dagenhart:

Well, we're getting close to time here, but before we wrap up, I'd love to go around, and get everyone's final thoughts. Mike, do you want to kick us off?

MICHAEL SOSNOWSKI:

So, I think really as a recap here, I think what we all could recognize is that retirement income planning, it's not a one size fits all solution, really comes down to a holistic approach to really identifying specific needs, unique circumstances, and really tailoring that portfolio to the individual. Now, if we're looking at just the portfolio, we want to make sure that we're not just relying on just the portfolio of investments. We want to make sure we do have other sources, hopefully guaranteed sources of income coming in, so that way we can, well, rest assured at night. So, that way we know we have the predictable income stream, but we also have our portfolio that may be able to grow a little bit more. So, not a one size fits all situation, but I think as an industry, we're all evolving to make it a little bit easier for individuals at the end of the day.

Jenna Dagenhart:

Michael?

Mike De Feo:

Yeah, I think I want to underline, and underscore these are complicated solutions. And when we're asking participants a lot to sort of understand what's being offered, and then to have them figure out how to appropriately allocate, or build an income strategy is really asking a lot. So, I've got an ask here. For the advisors that are watching that, they've got a part to play here, this is really something that they can bring to their plans, and to the participants that they're serving. In many instances, it's a way for them to increase their value proposition to the plans, and participants by first making them aware of these solutions, and making them available in the plan. We know, and we recognize that most individuals, the only financial advice that they're going to have access to is through their employer sponsored plan. And so we mentioned retiring with dignity, providing that advice to those individuals on how to use these solutions.

And let's be honest, the most scalable way to deliver that advice is through some type of mechanism, like a managed account where it could be scalable to individual participants. And I think that, that would be a great service that we can bring to the market. It also those user experiences, and the technology that are offered through some of those solutions, that really is the easy button here. We get hung up when we start describing all these features, and functionality of these strategies, and products. People get overwhelmed, and more likely their first reaction when they get overwhelmed is they decide not to do anything. And when we utilize the technology that's offered through these product solutions, it really gives us a mechanism to deliver the solution, to show what that solution is doing, and to educate that individual on what that expected outcome might be.

Jenna Dagenhart:

Mallory, I'll give you the final word here.

Mallory Padzer:

Wow. Final word. [inaudible 00:59:35]

Jenna Dagenhart:

No pressure.

Mallory Padzer:

So, yeah, no, I mean, as a whole, I think the three of us echoed a lot of the same sentiments, right? There are going to be risks that your clients are going to face in retirement, helping them from the very beginning understand what those risks are, and the solutions that you can offer as an advisor to help combat those risks, and give them a peace of mind, and assuredness through their retirement as well. And then I'd also say, just keep in mind of how you're educating them. We talked about visual learning versus just analytical learning. Everyone's going to be different. It's not going to be a one size fits all strategy, but really having some type of process in place to be able to educate your clients on these solutions so that they're not looking for outside resources. That'll be a testament to the advisor as a whole, and it'll create that long-term lasting relationship that all advisors are looking for with their clients.

Jenna Dagenhart:

Well, Michael, Mike, Mallory, thank you all very much for joining us today.

Mallory Padzer:

Thank you.

Mike De Feo:

Thank you.

MICHAEL SOSNOWSKI:

Yeah, thank you.

Jenna Dagenhart:

And thank you to everyone watching this Retirement Income Masterclass once again. I was joined by Mike Sosnowski, director at Transamerica Advanced Markets, Mallory Padzer, practice management presenter at MassMutual Strategic Distributors, and Michael De Feo, head of Defined Contribution Distribution at Allianz Life Insurance Company of North America. And I'm Jenna Dagenhart with Asset TV