A retirement dinner has been defined as the very last opportunity an employee has to be fed up the company. That applies of course unless you are retiring NFL great Ray Lewis and can go scrounge up some ground up deer antlers now that NFL quarterbacks are not on the menu. A recent survey found that having a stable retirement income “is a leading financial concern” for most people and 78% of respondents should be given the option to get a fixed monthly payment from their retirement accounts. Yet, with the Dow and S&P 500 surging past 14,000 and 1500 respectively and earnings roaring ahead 35%, will investors and savers abandon the steady payments of bonds and annuities for another seasonal foray into stocks at an all-time high. There is certainly evidence of that in January. After pouring over $700 billion into bond funds the last four years, last month investors shifted course and poured for the first time, hundreds of millions into stocks. Yet workers anticipate very little of their money coming from stocks with the vast majority anticipating money coming from bond-related source like: Social Security(79%), employment(79%, employer sponsored retirement plans(72%), IRAs(64%) and personal savings(62%) and traditional savings plan(56%). This tapestry, which with the exception of pension plans and social security contains no guarantees. Very few retirees are relying upon the predictability of “managed payouts” that fixed indexed annuities can provide with significantly more flexibility to fund long term care or home health care or even potential unemployment.
So how does the only choice besides social security, pensions, and look today in providing a safe managed payout. Two-thirds of companies have frozen benefits or closed their plans to new participants. In many cases, the future amount due to participants equals 25 percent of the market capitalization of a company. What this means is that after an enormous bull market in bonds that has resulted in double digit returns for pension plans, those gains are not being used to shore up pension liabilities and represent at record low rates, an enormous liability for future payouts to pre-tirees. Unlike the period before Sarbanes Oxley in 2002, these companies cannot use company stock or earnings to spruce up balance sheets and profits. As a result, many of these companies are offloading their risk to insurance companies to provide a lifetime of living benefits as these companies face their own “debt ceiling” and potential enormous losses on bonds. Southwest Airlines recently this by adding a fixed indexed annuity to its lineup to provide, pensioners with a steam of income that cannot be outlived. Income Planning Advisers and retirement income advisers should be keenly aware of this trend.
The pension-funding deficit rose to $74 billion in 2012, according to Milleman. Companies have determined that pension plans are constraining their growth and the liabilities represent a key to their key business and profits. At the end of 1999, pensions were over-funded by 30 percent which means they had more assets than obligations, now, after two bear markets and record low rates, plans are grossly underfunded again. The major benefit that an insurance company provides with an addition of an indexed annuity to the 401-k plan is that the company has outsourced risk to a third-party and provided its participants with more flexibility to gain access not only to a pension like option but long-term care and enhance payout options.