Defining Value Creation in the Decumulation Phase with Allianz Life's Danielle Kelso

As retirement plan participants transition from the accumulation phase to decumulation, the focus moves from building wealth to ensuring sustainable income—what’s also known as "value creation."

Danielle Kelso, Senior Institutional Solutions Consultant at Allianz Life Insurance Company of North America, joins the 401(k) Specialist Pod(k)ast to shed light on the changes and innovations shaping the future of retirement security. In her role, Kelso provides research, analytics and product expertise to the Allianz sales team, and shares her expertise on what retirement plan advisors and plan sponsors need to be thinking about when it comes to supporting a retiree’s lifestyle by ensuring stable income and managing risks effectively.

Key Insights:

Personalized Income Planning Replaces One-Size-Fits-All
The future of retirement planning lies in personalized strategies. Custom plans that integrate all income sources and reflect individual goals and spending habits offer better outcomes than generic investment approaches.

Redefining Value Creation in Retirement
Value creation is evolving beyond accumulating the highest portfolio balance. In retirement, it now centers on generating reliable, sustainable income that supports lifestyle and essential needs. This shift emphasizes peace of mind and financial security over raw returns.

Annuities Play a Key Role in Managing Retirement Risks
Modern annuities help mitigate key retirement risks such as longevity, market volatility, inflation, and personal life changes. Allianz research shows that portfolios including annuities significantly improve the probability of meeting income goals—by up to 25–40% in adverse markets.

See Also:

Exploring Guaranteed Income in DC Plan Trends with Allianz Life’s Matt Stubblefield

Solving the Portability Puzzle with Allianz Life’s Ben Thomason

Exploring Retirement Income Strategies with Joshua Grass and Todd Levy

Transcript

Danielle Kelso: [00:00:00] So really in retirement, value creation is all about making sure people can keep up their lifestyle, cover essential costs, and feel secure that their money will be there to support them

Brian Anderson: This is 401k specialist editor-in-Chief Brian Anderson, and this is the 401k specialist podcast. Today we're gonna explore the shifting landscape of retirement planning and the evolving concept of value creation. Whereas planned participants transition from accumulation to decumulation, the focus moves from building wealth to ensuring sustainable income.

We'll dive right into it right after this brief message.

To shed light on the changes and the innovation shaping the future of retirement security. We're happy to have Danielle Kelso, senior Institutional Solutions Consultant at allianz's Life Insurance Company of North America. Welcome to the 401k specialist podcast, Danielle.

Danielle Kelso: Thanks for having me. 

Brian Anderson: Alright, well let's dive right in and start with the [00:01:00] basics.

How do we traditionally define value creation in the accumulation phase of retirement planning? And what are the primary investment vehicles used to achieve it? 

Danielle Kelso: Traditionally value creation in the accumulation phase of retirement planning is centered around maximizing the growth of an individual's retirement savings with the primary goal being to build a substantial nest egg by encouraging consistent contributions from an early age and leveraging the power of compound interest.

For those relying on a defined contribution plan like a 401k, they'll typically be investing in growth oriented assets. This usually means stocks, which can be accessed through mutual funds or target date funds offered by their plan. And these options are really designed to ride the waves of market performance and hopefully deliver higher returns over the long haul, helping individuals boost their portfolio balance by the [00:02:00] time they're ready to retire.

With the primary focus being market growth during the accumulation phase, this can significantly contribute to building a substantial portfolio balance for retirement. However, even during the accumulation phase, maintaining a balanced portfolio is also really important. This means mixing both risky and safer assets to provide some protection against those inevitable market downturns.

After all, diversification is key to managing risk while growing one's retirement savings. 

Brian Anderson: Well, I would definitely have to say there certainly has been a lot more talk in the industry lately when it comes to diversification in retirement portfolios. Now as we transition from accumulation to decumulation, does the definition of value creation remain the same?

Are we still primarily focused on wealth generation, or does the goal fundamentally shift? 

Danielle Kelso: I would say this definition definitely does shift [00:03:00] after spending years building, um, that retirement nest egg, it is time for retirees to really enjoy it. The aim now is to help them spend their savings in a way that's sustainable with without constantly worrying about running out of money.

So really in retirement, value creation is all about making sure people can keep up their lifestyle, cover essential costs, and feel secure that their money will be there to support them no matter what happens. I. With the economy or how long they live. And while some may still have bequest motives, many individuals are primarily concerned about turning accumulated wealth into reliable spendable income.

Brian Anderson: All right, well, if, if the goal in Decumulation is indeed different, how must our toolkit of investment products and strategies evolve to meet these new objectives?

Danielle Kelso: This is a really great question and something plan sponsors and advisors should be actively thinking about when [00:04:00] they set fund lineups. As retirement planning shifts from building wealth to ensuring steady income during retirement, the financial toolkit needs to evolve as well.

The focus moves to supporting a retiree's lifestyle by ensuring stable income and managing risks effectively. Unexpected challenges like market swings or living longer than expected can leave even the most careful savers exposed. A key component of this evolved approach is the development of a withdrawal strategy.

This means creating a clear plan for accessing funds. It's a complex task, especially for those without a financial advisor, as it requires regular adjustments based on economic changes and personal situations. So to help with this, there's a growing interest in products like annuities. Modern annuities are flexible and can be tailored to meet individual [00:05:00] needs, offering guaranteed lifetime income, which provides retirees with a reliable source of funds for as long as they live. Also, these annuities can now be offered within defined contribution plans, allowing participants to integrate them seamlessly into their overall retirement strategy.

Brian Anderson: Yes. Thank you to the Secure Act and Secure 2.0 for the help with that. I'm wondering when it comes to retirement plan participants entering the DECUMULATION phase, how important do they see reliable, consistent income as being? Is it, uh, is it simply a desired outcome or is it, more of a core component of value creation in this new paradigm?

Danielle Kelso: Yeah. Reliable and consistent income during the decumulation phase is not merely a desired outcome. I believe it's a core component of value creation. Within this new paradigm of retirement planning, as individuals transition from their working years to retirement, the need for financial [00:06:00] stability becomes that much more important.

There's really four dimensions to the value provided by predictable income in retirement. First is spending confidence. Annuities can provide retirees with a stable income stream that can mirror the frequency of a regular paycheck depending on how the client chooses to withdraw funds. Funds. This reliable frequency can help foster confidence in spending their savings.

Second is risk mitigation. Annuities also can help protect against unforeseen risks, such as market volatility or longevity risk, ensuring a secure income regardless of external factors. The third dimension is ease of management. Consistent income streams reduce the need for active financial management, offering essential support for retirees who may face cognitive challenges.

And [00:07:00] finally, portfolio flexibility. By securing a portion of income through annuities, retirees can allocate other assets towards growth oriented investments or other financial products, enhancing their overall financial strategy. 

Brian Anderson: Alright, well, um, considering the importance of risk management in sustaining a retirement plan, how can incorporating a diversified strategy that includes annuities, help individuals manage their various retirement risks?

Danielle Kelso: Yeah. Incorporating a strategy that includes annuities can really help to manage a variety of risks participants face in retirement. The most obvious risk addressed by annuities is longevity risk, or the risk that a participant outlives their retirement savings. Annuities are generally guaranteed to provide a stream of payment for the rest of the individual's life, so there's no risk of completely running out of money.

Some [00:08:00] annuities, like a fixed index annuity can grow based off of an index performance, but are not directly invested in that index. Um, these annuities help address market risk because they often have floors or other features that help protect against market downturns while still allowing someone to participate in some of the upside of the market.

Through some analysis that Allianz has conducted using our portfolio impact report tool, um, this tool generates thousands of hypothetical scenarios. We found that in shocked market scenarios, the likelihood of achieving a specified income goal can significantly improve. By allocating a portion of a portfolio to an annuity, our analysis shows that the probability of reaching this income goal can actually increase sometimes by as much as 25 to 40% [00:09:00] in these shocked markets scenarios.

In addition, some annuities also offer increasing income features that can help offset inflation risk. Finally, annuities that are designed with guaranteed lifetime withdrawal benefits can also help protect against the risk of changing life circumstances by offering flexibility and how the participant takes the income and allowing full accessibility to the cash value of their annuity during accumulation and after lifetime income is activated.

This can make a huge difference if someone's health or other personal circumstances change. 

Brian Anderson: That's for sure. So, if value creation in retirement isn't just about, uh, highest portfolio balance, how should we be measuring success for retirees? What metrics are there that reflect a successful in sustainable retirement?

Danielle Kelso: I definitely agree that value creation isn't just [00:10:00] about generating the highest portfolio balance. It's also about generating sustainable retirement income that someone can rely on for the rest of their life. For this reason, we have a couple of metrics that we use. Uh, when we highlight outcome improvements for case studies that we conduct, one is the probability of success, which runs Monte Carlo simulations for portfolios with and without the annuity, and sets an income goal for these cases.

Ultimately, success is achieving the desired income goal in each year of retirement without running out of savings. Another metric we evaluate is the shocked probability of success, which measure measures that same probability of achieving income goals, but in shocked market scenarios. This is especially important because even if someone has a high portfolio balance, [00:11:00] this doesn't measure how well they will recover in a severe market crash.

So for instance, during the 2008 financial crisis, many retirees experienced significant declines in their portfolio values, which jeopardized their ability to maintain their desired income levels. The shocked probability of success allows us to see how well a portfolio can manage market shocks and still produce sustainable income.

Finally, we also evaluate median legacy value, which is similarly determined using Monte Carlo simulations and calculates within those scenarios, the median portfolio balance that is left to beneficiaries upon death. This value often increases with the addition of products like annuities because there is less of a need to draw down on the remainder of the portfolio since the annuity is doing a lot of the work in [00:12:00] producing a steady stream of income.

Brian Anderson: Alright, well, uh, before we wrap up here, can you tell me what you see as the biggest trends and innovations that will redefine how we approach value creation and retirement security in the years to come? 

Danielle Kelso: Yeah. In a recent portfolio impact analysis that we did at Allianz, all of the annuity products, not just our own, showed improvements over the portfolio without an annuity that's really significant.

With rising life expectancies and ongoing economic uncertainty, these products can play a key role in helping individuals achieve greater financial security in their retirement years. As these products gain traction in the retirement planning market, they have the potential to redefine our understanding of what constitutes a successful retirement plan.

By focusing on sustainable income rather than just a portfolio balance, we can [00:13:00] focus on what a retirement plan is intended to do, which is support people financially in retirement. Another emerging trend that is poised to reshape value creation and retirement security is the shift from one size fits all investment approaches to personalized income planning and holistic advice.

These strategies are tailored to integrate all income sources and reflect individual spending patterns, demographics, and goals. By offering more customized solutions, we can better address the unique needs and aspirations of retirees, ensuring that their financial plans are as dynamic and adaptable as their own lives.

Brian Anderson: I definitely have to agree. The industry certainly seems to be moving towards more personalized solutions over the one size fits all approach. Danielle Kelso, senior Institutional Solutions consultant at Allianz Life, thanks for joining us today and sharing your insights on the 401k [00:14:00] specialist podcast.

Danielle Kelso: Thanks so much for having me.