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The 3 Financial Risks in Retirement

One of the buzz-phrases in the retirement income world today is “product allocation.” Most people are familiar with “asset allocation.” It means dividing your savings among stocks, bonds, and cash (and perhaps commodities and real estate trusts) in a proportion that reflects your appetite for reward and tolerance for risk. But, according to some a person should switch from asset allocation to product allocation at retirement.

Product allocation refers to the practice of dividing up your savings among products that produce income (guaranteed or non-guaranteed) in different ways. One insurance company, in fact, recently created a web-based tool that shows people and their advisors how to generate steady revenue in retirement by taking regular withdrawals from a mutual fund portfolio, receiving a monthly income for life from a variable annuity with a lifetime income benefit (and an annual increase in the amount on which the income is calculated), and receiving additional monthly income from an immediate annuity.

Why those product types? According to Toronto-based academic and consultant Moshe Milevsky, each product protects the owner or owners against one of the three major financial risks in retirement. The mutual fund portfolio can help protect against inflation by holding stocks, which historically have tended to keep up with inflation. The variable annuity can protect against “sequence risk”. That’s the risk that a bear market will occur near your retirement date.) The immediate annuity protects against longevity risk-the risk that you’ll run low on money while still living. Variable annuities with living benefits also help protect against longevity risk. But the immediate annuity can actually reward you for living longer-something the variable annuity doesn’t do.

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