In order to put a traditional retirement plan together for your clients, you basically need to know these five things:
- How much money have they saved?
- What rate of return are they able to get on their savings?
- How much income do they need off of their savings per year?
- How long do they need the income for?
- What rate of inflation should we include?
Naturally, you’ll crunch all of these numbers to determine whether or not their savings will be able to provide them with the income they need for as long as they “plan” to live.
This seems so simple, right?
Well, there’s a really big problem with this approach. In fact, I’d argue it’s the single biggest problem with traditional retirement planning: You have to try and guess when your client is going to die.
Most people use average life expectancy tables, but averages include people who died at 60 and people who died at 100. And neither you nor I have a reliable way of predicting whether your client will die early, hit the average, or beat the odds.
Unfortunately, they are hoping they live a long life, yet the longer they live the lower the chances their money will last. It’s a retirement Catch-22.
Related: 9 factors that affect longevity
If they get lucky (or should I say, if they’ve done really, really well), they will live to a ripe old age AND their money won’t run out. But the chances of this happening are pretty low for the majority of people.
Consider this: There’s a “rule” that says retirees can withdraw 4 percent of their retirement savings each year without depleting their balance or running out of money. But some planners now believe that this “4 percent rule” is outdated advice that doesn’t work anymore in the current low-interest rate environment? And do you really want to stake your clients retirement on an outdated rule? Probably not.
To put it into perspective, if you were in need of open heart surgery and your doctor told you he was going to use outdated medical procedures, how would you feel? Not good.
With heart surgery, your life is at stake. With retirement planning, your client's lifestyle is at stake. If it's not handled well, there’s a good chance your client could having to get back in the workforce in their proverbial golden years to make ends meet.
A recent Gallup poll found that 59 percent of those surveyed were worried they wouldn't have enough money for retirement. This was by far their biggest concern.
How depressing is it for your clients to have to guess when they are going to die and then hope they don’t live “too long”? Obviously, you don’t want this hanging over their head while they’re supposed to be enjoying their retirement.
When you build a retirement plan for your clients, it should cover them regardless of how long they live. Because there’s actually a pretty good chance they’ll live longer than we expect them to.
In 1980, only 2.8 percent of those 65 and older were age 90 or above. Today, that figure sits at 4.7 percent. And by the year 2050, experts expect it will reach 10 percent.
Average life expectancies are climbing fast, so you need to plan for the possibility of your clients living past 90.
Related: 90 is the new 70
Okay, so you’re now aware of the biggest problem with traditional retirement planning. The question now is, what can you do about it?
I personally believe a great option to solve this problem: an annuity.
An annuity is a contract you purchase from an insurance company. For the premium your clients pay, they receive certain fixed and/or variable interest crediting options able to compound tax deferred until withdrawn. When they are ready to receive income distributions, this vehicle offers a variety of guaranteed* payout options. Annuities are priced based on the life expectancy of a large group of people. Some annuity participants will die early, so they will collect less income. Others will live longer, so they will collect more income. The participants in the annuity average out and offset each other.
Related: Annuities for retirement income
But here’s why annuities provide so much reassurance and confidence: It doesn’t matter how long your clients live. They will collect income during their retirement until they die. They don’t have to worry about “running out of money.”
(*Note: Annuity guarantees rely on the financial strength and claims-paying ability of the issuing insurance company. Annuities are insurance products that may be subject to fees, surrender charges and holding periods which vary by carrier. Annuities are NOT FDIC insured.)
An annuity may be an ideal solution for filling retirement savings gaps. (Photo: iStock)
Even better, studies show that people who own annuities are happier than those who don’t. This is because annuity owners don’t have to worry about account balances, stock market returns, or anything else like that. Their annuity income doesn’t fluctuate due to markets or the economy. It’s just “mailbox money”: It arrives every month on a predictable schedule. Think about the difference in a person’s stress and anxiety related to money, knowing that uncertainty and volatility aren’t going to change their lifestyle!
There is one downside to this solution. Annuities are boring! When the market does well, and a lot of people celebrate their big returns. Annuity owners more than likely won’t be sharing in the celebration as their income annuity will be pumping out the same income that it was set up to give them. They’ll just be receiving the same old boring paycheck, year in, year out.
But when it comes to retirement, sometimes boring is the best way to go so they can focus their attention on meaningful things and not their income. And just because they own an annuity, doesn’t mean they can’t invest in other more exciting things along side of it. But they won’t be risking their lifestyle if they’ve got their income needs covered first.
So, what other financial vehicles can solve this problem? I’ve turned over every rock, trying to find the answer. I keep coming back to the same thing: Boring Annuities.
If your clients aren't considering using annuities as a retirement vehicle, I suggest you take some time and educate them more carefully. After all, it’s hard to put a price tag on the feeling of financial confidence that annuities can provide.
Shawn Sparks is the author of the book, "The Advisor Breakthrough." If you’d like to learn more, you can instantly download the first section of his book for free by clicking here.
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