In this week's edition of The FIDx Five, there’s talk about rules, whether with financial planning or fintech regulation, retirement and annuities, and a big pension buyout.
Rules? What Rules?
Rules can sometimes make a difficult task easier. But as the game changes, the rules may need to change too. This is especially true when it comes to financial planning and following what have been tried and true rules of thumb, like saying housing expenses should only consume no more than 30% of pre-tax income. With the median cost of rent hitting north of $2,000 a month in July, that’s no longer realistic for many households. The 4% rule is another one that needs to be reconsidered. For current retirees facing the potential of a prolonged market of low returns, some experts say retirees should consider something closer to a 2.5% to 3% rule. (Suzanne Woolley, FA Mag Sept 13th, 2022, Four Financial Planning 'Rules' That Advisors Need To Abandon, Link)
Experts Weigh in On Postponing Retirement
Planning for retirement at any time is tricky business. Throw in a steep market selloff and record inflation and suddenly you’re left asking whether you can retire at all. A panel of advisors was recently interviewed by Barron’s to share their opinions. In a nutshell, it depends on the client and their unique circumstance. But there was some consensus among the experts. For example, any plan that involves withdrawing income and principle is subject to sequence of returns risk, therefore clients should diversify their income stream with sources unimpacted by market swings – like Social Security or annuities. And there’s always the waiting game. Some people may be willing to stay in the workforce for another year or two until markets recover, or they can perhaps look at getting a part-time job to supplement the drawdown of assets. Click here for more insights. (Andrew Welsch, Barrons September 13th, 2022, Should You Postpone Retirement? What Advisors Say, Link)
$16 Billion Reasons Why
In the biggest US pension plan buyout in a decade – and the second largest ever - IBM purchased group annuity contracts from Prudential Insurance Co. of America and MetLife to transfer $16 Billion in US defined benefit plan liabilities. Each insurer will have an irrevocable commitment to pay 50% of the pension benefits for each transferred participant that are due on and after Jan. 1, 2023. The purchases of the contracts, which closed Tuesday, transfers the benefit-paying responsibility for about 100,000 retirees and beneficiaries. The last time a pension transfer garnered headlines of this magnitude was way back in 2012 when General Motors transferred $29 Billion to Prudential via a pension buyout transaction. (Rob Kozlowski, Pension and Investments, September 13th, 2022, IBM offloads $16 billion in pension liabilities, Link)
Plan Sponsors Should Give Annuities a Second Chance
Dear Plan Sponsors, it’s time to give annuities another look. That’s what retirement industry veterans are saying, especially as market volatility, rising interest rates and record inflation are becoming the norm. Despite product innovations and improvements, the perception of annuities among plan sponsors is stuck in the past. Fewer workers are retiring with pensions, which means retirees will need a strategy to protect against longevity risk. Making annuities available to plan participants gives them access to a solution that – without a financial advisor – they may never consider. This is clear in a new study done by Nationwide comparing how advisors think about annuities vs consumers. In the study, for example, 48% of advisors said they would consider adding a variable annuity with a living benefit compared to just 26% of investors. Objections to annuities are largely rooted in products of the past which often featured extended waiting periods and higher fees. Today, far more flexible products are available and plan sponsors looking to help their participants secure income after retirement need to update their knowledgebase. (Noah Zuss, Plan Sponsor, August 26th, 2022, Dated Thinking May Be Holding Back Annuities Link)
Fintechs Bring Consumers Choice, but How Should They be Regulated?
Buy Now, Pay Later (BNPL) apps aimed at consumers were the focus of a Senate Committee on Banking, Housing and Urban Affairs hearing on September 13. The discussion on fintech shows a divide between how to regulate these new products while encouraging innovation in the marketplace. Many of the newer consumer financial products discussed in the hearing are designed to help consumers meet short-term credit needs. There are concerns about evaluating consumers’ ability to repay and the impact these products could have on consumers' overall credit. The Consumer Financial Protection Bureau should have the authority to supervise the use of these products, but only after more research is complete, experts say. In the hearing memo, Ranking Member U.S. Sen. Pat Toomey, R-Pa. said “Fintech innovations could potentially improve the efficiency of the financial system and financial outcomes for businesses and consumers. However, without strong consumer protections and transparency requirements, the new technology could pose certain risks, potentially leading to unmanageable debt or other harmful outcomes…The best form of consumer protection is a robust, competitive market. That’s why, instead of curtailing new financial products, regulation should facilitate innovation and consumer choice.” (ACA International, September 15th, 2022, Finding a Balance for New Fintech Products Link)
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