A client aged 40 has just started a new job with a high salary and wants to aggressively save for retirement. They are concerned about potential longevity risk and want to ensure they have sufficient income throughout their retirement years, which they anticipate starting at age 65. Which of the following retirement planning vehicles would be most suitable to address their primary concerns?
- AAn employer-sponsored 401(k) with a matching contribution and a diversified growth-oriented portfolio.
- BA fixed indexed annuity with a surrender charge period of 15 years.
- CA traditional Roth IRA, maximizing annual contributions.
- DA deferred variable annuity with a guaranteed lifetime withdrawal benefit (GLWB) rider.
Show answer & explanationAnswer & explanation
Correct answer: D. A deferred variable annuity with a guaranteed lifetime withdrawal benefit (GLWB) rider.
The client's primary concern is 'longevity risk' – outliving their savings. A deferred variable annuity with a Guaranteed Lifetime Withdrawal Benefit (GLWB) rider directly addresses this by providing a guaranteed income stream for life, regardless of market performance or how long the client lives. While 401(k)s and Roth IRAs are excellent accumulation vehicles, they don't inherently provide a guaranteed income stream against longevity risk.
Why the other options are wrong
- A. A 401(k) is an accumulation vehicle, not a guarantee against longevity risk, though it helps build wealth.
- B. A fixed indexed annuity provides principal protection and market-linked growth, but a 15-year surrender charge is restrictive and it doesn't inherently offer a GLWB without an additional rider, which is the key feature here.
- C. Roth IRAs are for tax-free growth and withdrawals, but don't guarantee lifetime income.
Longevity Risk Mitigation
Strategies and financial products designed to ensure an individual does not outlive their retirement savings, providing income for their entire lifespan.
- Primary concern for retirees as life expectancies increase.
- Often addressed with annuities, especially those with lifetime income riders.
- Can also be managed through conservative spending and diversified portfolios.
Memory trick: Longevity's a long road; inflation's a thief; healthcare's a bill; market's a thrill.