Over the last several months, we’ve been hearing more about “Peak 65,” but what exactly is it? The baby boom lasted from 1946 to 1964, and older baby boomers have mostly aged out of the workforce. However, the final cohort of baby boomers, which represents 30 out of the 72 million still alive, will reach 65 starting in 2024. From 2024 to 2027, “Peak 65” will have 4.1 million Americans turning 65 annually, two to three times more than a few years ago.
As a member of the late baby boomer cohort, I can tell you that while we were there for many of the historical events that shaped our generation (the Kennedy assassination, the civil rights movement, the Vietnam War, Watergate, The Beatles and other Classic Rock, etc.,) we were often too young to participate or be impacted directly. Retirement has become part of that as well. Historically, after World War II, retirement was funded through defined benefit pension plans provided by an employer or union, personal savings, and Social Security/Medicare, with a Social Security full retirement age set at 65.
For the “Peak 65” cohort, being too young struck again when, in 1983, the Social Security full retirement age was changed to 67 and phased in for people born after 1960. While the defined benefit pension was the norm for earlier baby boomers, it started to be phased out by companies in the 1990s and early 2000s. Instead, private employers moved to defined contribution programs like 401(k) and 403(b). In addition, many fewer members of the “Peak 65” late baby boomer generation worked for unions or government entities, lowering access to those defined benefit plans.
Combining all of this with the Great Recession of 2007—which impacted late baby boomers’ mid-career—disrupting employment continuity and earnings, we have the perfect financial storm impacting late baby boomers’ ability to retire and maintain their current lifestyles. It has been reported that about 20% of people 65 and older are in the workforce in some way, mostly part-time. Some of these folks are people who “retired” during the Covid-19 pandemic and then re-entered the workforce when it became safer to do so again.
The challenge for late baby boomers now is how to create consistent income for retirement that is protected from market swings and is sufficient to keep up with inflation. This was a challenge when inflation was low and became even more difficult when inflation rose at the end of the pandemic, even though interest rates went up. Unfortunately, many people have been claiming their Social Security benefits earlier than their full retirement age to offset increasing expenses or to support earlier retirement caused by illness or adverse career outcomes—including forced unemployment—reducing their monthly lifetime benefit. Additionally, despite a substantial life expectancy drop during the pandemic, life expectancy has recovered, meaning that lifetime monthly retirement income will need to last into the 2040s or 2050s.
This leads to annuities and the technology that supports carriers selling and servicing them. The Setting Every Community Up for Retirement Enhancement Act of 2019 (SECURE Act) made it easier for plan sponsors to create annuitized options within a defined contribution plan that are similar to the benefits received from defined benefit pensions. The Securing a Strong Retirement Act of 2022 (SECURE 2.0) supports the use of qualified longevity annuity contracts (QLAC). Many baby boomers have been putting money into fixed annuities and fixed income annuity products for the last few years. While variable annuities have the potential to offer higher returns, uncertain and volatile equity markets have hindered their sales. Recently, fixed index-linked annuities (FILAs), which combine the principal protection of fixed annuities with the greater investment gain potential of registered index-linked annuities (RILAs) and multiyear guaranteed annuities (MYGAs), have gained in popularity.
Now, here’s the hard part. The late baby boomers of “Peak 65” will no longer be accumulating wealth. Rather, they will be drawing down on defined benefit plans if they have them, defined contribution plans with required minimum distributions for IRAs, annuities, and Social Security. If the Social Security trust fund and Medicare default in the mid-2030s, the amount of funds paid out from those programs will be decreased, causing even more funds to be withdrawn from the other available private retirement plans earlier. Systems and processes supporting annuity contract provisions such as guaranteed living withdrawal benefits, payout processing, death benefits, and supporting functionality such as self-service transactions, inquiries, and protections for owners against account takeover will need to operate at much higher scaling levels than have been the case in the past. In many cases, legacy systems will need to be replaced to handle the scale, costing a lot of money. Digital front-ends will need to evolve, and payment systems will have to be able to scale and in the future handle new standards like the FedNow service for real-time payments.
We have already seen companies acquire new annuities businesses or shed their existing ones to reorient their use of capital and focus more on businesses they do or do not want to prioritize as part of long-term corporate strategy. Many recent transactions have been either block reinsurance or flow reinsurance—where the annuity issuer still administers and services policies. The bottom line is that carriers that commit themselves long-term to the annuity market will need to invest in modernizing and scaling their systems. An IT blueprint laying out how all of the technology should fit together, including emerging tech like GenAI, and a five-year roadmap outlining what projects need to be done in what sequence between now and 2030 to arrive at the desired blueprint, will be a must for annuity carriers. For the good of all those in the “Peak 65” cohort, failure is not an option.
