It's time to Refinance Retirement

After completing the worst week for the markets in over 75 years - and in some cases in stock market history - it is time to completely change our thinking about retirement. Trillions have been wiped out of stock market value, much of this in retirement accounts. It is time to refinance retirement.

Just as the days of no money down, interest only, or even adjustable rate mortgages are largely dead and gone, the days of thinking retirement income can be effectively and sustainably produced with a strategy based on withdrawing from assets designed for asset accumulation are gone. While income annuities were about a $7 billion market in 2007, I'm going to go out on a limb and say this number will grow tenfold in the next five years, to $70 billion. Even then, that's still less than half the sales volume of VAs in 2007.

The long ignored and unloved income annuity is going to get it's due, and fast. It is in effect the 30 year fixed rate mortgage of the retirement income world. How many folks stuck in two year ARMs today would give their eye teeth to avoid that horrible upward jolt in their interest payments, and refinance to a 30 year note? Unfortunately, they can't. Their homes are worth less, and thus they don't have the required ratios to qualify.

Let's take the spirit of that question and apply it to retirement income. How many retirees today who started withdrawals from mutual funds or variable annuities in the last few years would love to turn back the clock and refinance that income stream, and instead of having it come from a shrinking asset, have it come from a source guaranteed to never stop paying them? An example will help illustrate how the drastically altered financial landscape of 10/12/08 will very likely drastically change perceptions about what is a good deal - or not.

Assume you had retired 2 years ago with $1,000,000 in savings at age 65. The market had been doing well for the last few years, and that income annuity you'd read about was unappealing to you because you had to irrevocably give up some of your savings in exchange for the income. For example, you were not interested in giving up half your $1million in exchange for a $35,000 income stream (equivalent to a 7% cash flow) guaranteed to last as long as you and your wife, or 20 years, whichever was longer. In effect, you were guaranteed that you or your heirs would be guaranteed to receive back no less than $700,000 from your $500,000 investment($35,000/yr x 20 years minimum guaranteed payout). If you and/or your wife lived to be 95, the total income you'd have collected would be more than $1 million. In any case, this sure thing didn't seem appealing when the market returns were healthy and you felt you could not only get income but continue to grow your nes, egg from which you were taking your income.

Instead, you're now 2 years into retirement. The 5% withdrawals you have been taking ,combined with the market collapse, has your nest egg at about $600,000. You've lost $400,000 of nest egg, the equivalent of 8 years of income at $50,000 per year (5%) from your original $1million portfolio. Readjusting your 5% withdrawal to the value of your shrunken nest egg means your $50,000 income is now $30,000 - a 40% reduction in income. Simply growing that $600,000 back to the $1million starting value will require a heroic 70% net return in underlying assets...and an even larger gross return if you account for continuing withdrawals and investment expenses. That may translate into several years of things going right - a significant chunk of a 20 or 30 year retirement.

The loss of control that so many focus groups and studies have indicated is the slam against income annuities may, in a cruelly ironic way, be the issue that turns the tide in favor of income annuities. Control is a double-edged sword. How much control does the retiree who saw $400,000 evaporate from their nest egg feel today, vs. the control that the income annuity owners feels in knowing that their $35,000 income stream will continue whether the markets recover in 2 years or 20 years.

We have overconsumed as a country for too long, and part of that overconsumption was built on the belief that we could have it all no matter what. Exotic mortgage products brought the dream of granite countertops, two story foyers, and three car garages to those who weren't satisfied with their more modest digs, despite income that didn't really support the mcmansion.

In the same fashion, exotic retirement income products sprang up promising retirees a no-compromise approach to retirement. Stay in the market, and you can be guaranteed an income stream for life of a specified minimum amount, and the opportunity to have that income grow, and.... you don't have to give up control of that asset - you can have it all! All of this is supported behind the scenes by hedging programs which require PhD levels of understanding about risk and assumption making - sound familiar?


Greyhound used to have a slogan that worked well in the days before long distance bus travel became relegated to drifters and wackos: Leave the driving to us. It meant don't worry - take a load off - come aboard, relax, and know that you will arrive at your destination relaxed and unharried, because we're looking out for you.

The income annuity provides that same peace of mind - relax, your checks will continue come hell or high water, just go about your business of enjoying retirement and leave the driving to us. That message is going to begin resonating as retirees begin to refinance their retirements.