America faces a retirement crisis that is perhaps even bigger than the "47 million uninsured" crisis we face in healthcare. Based on figures from the Center for Retirement Research at Boston College, more than 60% of working-age households are at risk of not being able to maintain their standard of living in retirement. This article will focus on financial products individuals can purchase to reduce the risk of outliving their assets, including products being offered today and products that are under development. My views are somewhat unconventional, particularly with regard to current products.

I believe that the most popular retirement products do very little to reduce the risks associated with retirement. One product that can provide valuable protection against the risk of outliving assets, the income annuity, has never become popular. Right now, products being developed in academic and research institutions have the potential to do a much more effective job than the products available today. The challenge will be getting these new products built and effectively distributed.

Retirement Planning Today

Most retirement planning being done today involves planners and clients working together to assess the adequacy of savings to meet retirement needs. Planners gather client data on assets, liabilities, future sources of income and expected future expenses. They may also have the client do a risk-tolerance assessment to provide input for asset allocation recommendations.

Using these inputs, the planner will likely use tools like financial projection software, an asset mix optimizer and Monte Carlo analysis in order to create a recommended sustainable withdrawal strategy for the client. One such strategy might be that the client withdraws 4% to 4 1/2% of assets in the first year and increases withdrawals each year, based on inflation. An alternative might be that the client takes a higher percentage initially, but then varies each year's withdrawals depending on investment performance.

These approaches can work well for a client who has built up sufficient assets (or has sufficient pensions or other income) that a withdrawal rate of 4% to 4 1/2% can provide adequate cash flow. It preserves investment flexibility and liquidity, and, if the client dies early, it maximizes bequests. However, for clients of more modest means, the 4% to 4 1/2% may not be enough to sustain their pre-retirement standard of living. Raising the withdrawal percentage increases the risk that assets will not be adequate for the full span of retirement. Among the risks are: living longer than expected, incurring significant health—or long-term-care costs and experiencing poor investment performance, particularly in the early years after retirement. Such clients may be able to increase retirement cash flow and guard against the risk of outliving assets by purchasing some kind of insurance, in the form of an annuity or other financial product. Purchasing such products gives up some liquidity and flexibility, along with spending funds that would otherwise be available for bequests. However, for many, it may be a necessary tradeoff.

Popular Products, No Protection

Target-date mutual funds and deferred annuities are two products that are popular with retirees. Despite their popularity, though, these products don't manage the risk of outliving assets. Target-date mutual funds are basically balanced funds that automatically shift away from equities and toward fixed income as the client ages. Some are set up to provide for regular withdrawals, and some even adjust the amount of withdrawals based on performance of the underlying funds. To the extent that such funds help clients keep asset allocations on track, they do provide some benefit.

Another popular product is the deferred annuity—available both in fixed and variable (equity-linked) versions. This product can be used to build tax-deferred savings, and it allows the purchaser to "annuitize"—that is, turn the savings into a lifetime stream of income. Sales of deferred annuities totaled an impressive $244 billion in 2007.

However, the best measure of risk reduction is not the level of sales, but the amount of assets annuitized. Based on LIMRA data, annuitized assets have averaged about $10 billion per year since the year 2000. If we think of a "steady-state" or "input-output" model, the level of annuitizations (output) should roughly equal the deferred annuity sales (input). Given the huge disparity between $10 billion and $244 billion, there are a lot of deferred annuities that never get annuitized. These annuities end up functioning like tax-deferred, high-expense mutual funds, and they do not help reduce the risk of outliving assets.

Living Benefits: the Right Direction?

Some changes in deferred annuity products during the past few years may point them more in the direction of protecting purchasers from outliving assets. These changes involve the introduction of living benefits. First launched in the late 1990s, these benefits have gone through some transformations-the latest is called the guaranteed lifetime withdrawal benefit, or GLWB.