From the November 2008 issue of Boomer Market Advisor • Subscribe!

The shaky promise of boomer income

The importance of financial advisors to leading-edge baby boomers has been ratcheted to a new level. Most boomers who expect to retire within the next ten years have been pushed back by the economic conditions in which we find ourselves.

At the least, four bad things have happened: the biggest asset of many, the primary residence, has dropped in value; equity values are down; there is a very strong likelihood there will be little, if any, economic growth for awhile, restraining the future growth of equity values and; the cost of essential goods and services are rising and likely to continue.

For those who have barely accumulated enough for a secure retirement, the path to financial security is littered with new obstacles. Your clients need you now.

A strong foundation of lifetime income is more important in uncertain economic times. Showing clients how to produce guaranteed lifetime income as efficiently as possible is more vital than ever. Many are shaken by equity market performance. They still need to invest in equities, but would feel better if they had a firm foundation of lifetime income. There are two examples of how to efficiently build a base of guaranteed lifetime income.

First, to use myself as an example, I can claim Social Security benefits this month when I turn age 62 and get $1,682. Alternatively, I can wait to age 70 to claim. At that point the Social Security Administration estimates I would get $3,077 a month, or 82 percent more. And, of course, cost of living adjustments to Social Security would be increased from a higher base after that. The most efficient time to claim Social Security could make an important difference to my financial security.

There are, of course, trade-offs. If I die early I would have sacrificed a good deal of income from late claiming. But if I live to average life expectancy or longer, my more efficient time of claiming would have served me well. In ordinary economic times I might not have wanted to make this trade-off. In these economic times the greater efficiency of delaying Social Security can give me financial protection if I am blessed with long life. But, more importantly, it gives me a greater feeling of financial security today.

As another example, I return to an issue I have addressed in earlier columns, but with an extra element. I previously addressed how life annuities allow people to get more income from the fixed portion of their portfolio. I now would like to add annuities with guaranteed lifetime withdrawal benefits to that discussion. Take a 70-year-old man who wants a guarantee of $1,000 a month. He puts $240,000 in a 10-year corporate bond paying 5 percent, gets his $1,000 a month for 10 years and then gets a return based on then prevailing rates. They could be higher or lower in 2018 -- who knows?

A more efficient way of getting guaranteed income (that is sure to adjust upward in 10 years) is to put $130,000 in a life annuity -- which would produce $1,000 a month for life -- and put the other $110,000 in an annuity with GLWB. There are products that guarantee that the benefit base will double in 10 years and that if payments start at age 80, the annuity owner will be guaranteed to get 7 percent of the benefit base, guaranteed for life.

In ten years, the benefit base would be guaranteed to be at least $220,000 and 7 percent of that is $15,400 a year, or $1,283 a month. Thus, 10 years after the original investment of $240,000, the investor would be getting a minimum of $2,283 a month guaranteed for life (the income from the life annuity plus the income from the GLWB). That would be an income of 11.4 percent of his original investment -- pretty good for the fixed portion of the portfolio.

There are trade-offs with this approach. Again, fewer assets would be available in the early years. But there is a good chance of greater assets in the later years and a strong likelihood of more income for life after 10 years. The promise of more income for those who live longer means greater financial security for all.

Showing people how to get a bigger foundation of lifetime income for less money is a major value you bring to clients.

Mathew Greenwald is president of Washington, D.C.-based Mathew Greenwald and Associates.

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