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Life Health > Annuities

Retirement Investors Are Losing Faith in 60/40 Portfolios, 4% Rule

By John Manganaro

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What You Need to Know

  • A new survey suggests more Americans are worried they will outlive their money in retirement.
  • Demand for annuities is quickly growing, as are fears about market volatility and Social Security's solvency.
  • Whether or not they embrace annuities, advisors should work with their clients to create more reliable plans for structuring retirement income.

More than a third of respondents to a new retirement industry survey feel the so-called “4% safe withdrawal rule” is no longer a valid retirement income strategy due to the pressures caused by inflation, longer lifespans and market volatility.

In fact, according to the Alliance for Lifetime Income’s 2023 Protected Retirement Income and Planning study, a sizable and growing number of Americans feel such rules of thumb should be replaced with other retirement income approaches, including those that incorporate various types of income guarantees.

As quoted in the new report, Jean Chatzky, education fellow at the Alliance’s Retirement Income Institute and founder and CEO of HerMoney, says people are coming to understand that today’s retirees are living longer than previous generations — and they want greater certainty that they won’t outlive their money.

“Protected income is there to provide peace of mind and works as a paycheck in retirement to cover basic monthly expenses and unforeseen costs,” Chatzky argues.

According to the data from the Alliance for Lifetime Income (or ALI), 51% of investors further report uncertainty in whether the traditional 60% stock/40% bond portfolio allocation remains viable, with more than a quarter (28%) saying it is outdated and that other asset classes should be implemented as building blocks for growing and protecting retirement wealth.

Market Woes Boost Annuity Consideration

The ALI data specifically shows that 37% of consumers now find the 4% safe withdrawal rule to be outdated in an era of rapid inflation and rampant market volatility.

At the same time, the survey finds investors on average want 80% of their retirement savings to be invested in “safer investments,” while those protected by a pension or an annuity have a significantly more positive outlook on their retirement prospects.

Amid concerns about market volatility and falling retirement investments, Chatzky observes, consumer demand for annuities has grown to an all-time high.

To underscore the momentum, she points to data published by LIMRA showing that consumers enacted $312 billion in total U.S. annuity sales in 2022, marking a 23% increase from 2021 and 18% higher than the prior record of $265 billion in 2008.

“People want protection in today’s volatile markets,” warns Jean Statler, CEO of the Alliance for Lifetime Income. “Awareness and understanding of annuities are increasing, so it’s encouraging to see people reevaluate their retirement savings and add annuities to their plan.”

ALI’s survey suggests the vast majority (93%) of those who protected their portfolio with an annuity in 2022 are satisfied with their investment choices for 2022, including 44% who are “extremely satisfied.”

Tough Retirement Landscape

According to the ALI survey, a slight majority (51%) of consumers between ages 45 and 75 feel they do not have enough retirement savings to last their lifetime, and 32% are not confident they will even have enough to cover basic monthly expenses.

Due to these financial constraints, some 16% say they have retired but later returned to work in some capacity.

Many of those who have retired, the research suggests, did not do so entirely on their own terms. Specifically, a majority (53%) reports that one of the main reasons they retired was circumstances beyond their control, such as health-related concerns, job loss, mandatory age requirements and the effects of the COVID-19 pandemic.

Adding to the pressure, 43% believe the 2022 market setback represents a longer-term change that negatively alters their retirement outlook.

“We’re about to hit ‘peak 65’ next year, a historic demographic event when the largest number of Americans ever will reach 65, and far too many people still don’t have the savings and protected income they need to retire comfortably,” Statler adds. “The retirement savings crisis is about to become a retirement income crisis, so we have to continue to do everything we can to help people better prepare, especially those close to retirement.”

Social Security Concerns

As the future of Social Security and Medicare remains an ongoing debate in Washington, the ALI study finds only 54% of investors are confident in the solvency of Social Security, and fewer than two in 10 are very confident.

Despite this, the ALI reports, nearly three-quarters (73%) are counting on Social Security income, with 40% saying Social Security is a critical part of their retirement income.

“For many Americans, Social Security alone will not cover day-to-day living costs,” Chatzky points out. “Social Security only replaces about 40% of pre-retirement income, which leaves a large gap that, for past generations, a company pension used to cover.”

Photo Credit: Adobe Stock

John Manganaro

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