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It's Time To Shift Gears To Wealth Distribution Planning

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Manager for First Union Insurance Group
Group, Charlotte, North Carolina. He may be reached via e-mail at
[email protected].

Information and advice about how to accumulate wealth seems to be prevalent everywhere in our society today. Potential consumers can find opinions on which stocks or mutual funds will help them grow their retirement nest egg on any financial news show, in publications on the magazine rack at the local bookstore, at any number of sites on the internet, or from their local brokerage house.

To the contrary, however, there appears to be very little talk or writing about strategies on how to distribute wealth effectively during the retirement years. The wealth distribution market would appear to represent a “golden” opportunity for those planners who are willing to shift gears and spend more of their time working with those clients who need to best generate an income during their retirement years, to replacing the one they earned during their employment years.

Traditionally, retirement income has come from three sources:; social security, employer- provided pension benefits, and personal savings. Two of these three sources will provide a retiree with a guaranteed income for life. Unfortunately, the future of one, social security, remains uncertain. I would venture to guess that the biggest challenge in finding the resolution to any impending crisis is how to appease the large retiree population and the lobby group that they represent. Seniors do not want the government messing with their “guaranteed income for life.”

With respect to the second traditional retirement income source, pension benefits, many companies are deciding to get out of the mortality game. More companies are now choosing to offer defined contribution plans in lieu of defined benefit plans. This has placed resulted in the “income risk” being placed back into the hands of the employee.

Lastly, it is common knowledge that the saving rates in the United States is well below that of other industrialized countries, which could lead many to suffer significant income shortfall in their retirement years.

As financial professionals we are in the business of providing our clients with financial security. In retirement, financial security can be defined quite simply as having income. It means; having enough income to replace the paycheck that was once provided by an employer so that the client can: A) make the mortgage or rent payment, B) make the car payment, C) pay the long -term care and life insurance premiums, and D) pay the country club dues.

Post- retirement planning is not about accumulating large sums of wealth. It is about having an income and then, maybe perhaps, effectively distributing the remainder of any wealth to my loved ones.

What is the key to minimizing a client’s income risk during their retirement years? The answer, in a word, is diversification.

When we develop plans for clients who are looking to accumulate funds for goals such as college funding or making a major purchase, we stress the importance of diversification through asset allocation. We communicate the importance of owning stocks (large cap, small cap, and international), bonds, and cash equivalents in a well rounded portfolio. Stocks provide for good growth potential, bonds provide consistent income to the portfolio to help dampen any stock price volatility, while cash equivalents provide principal guarantees and consistent rates of return.

In post- retirement planning, the story of developing an income stream should be no different. Diversify asset classes and product types used to provide income consistency and income growth potential. Diversify asset classes and or product types used to

provide income consistency and income growth potential. Many planners will use systematic withdrawal plans from mutual funds or laddered bond portfolios to provide income for their clients in their retirement years. However, neither of these assets provides for a guaranteed income for life. however.

There is only one product type that can provide those guarantees. That product is an annuity.

In a study released several months ago, Tillinghast Towers-Perrin predicted that the income annuity market will grow from approximately $2 billion in 1999 to about $20 billion in 2003. An aging population coupled with the increased uncertainty surrounding traditional sources of guaranteed retirement incomes are among the main drivers for the expected growth.

Traditional immediate annuities had several shortcomings. They removed the financial professional from the asset management equation, provided compensation one time and represented an irrevocable decision on the part of the client. Today however, product providers are beginning to address these concerns through unique features in on immediate variable annuity contracts.

An immediate variable annuity allows you as the financial professional to remain engaged in the asset allocation process. Your clients guaranteed income stream is determined by the performance of the underlying sub-accounts that you choose relative to an assumed interest rate. Some of these products have full or partial commutation features (theres an SAT word) which at allows you to stop the guaranteed income payments in exchange for the net present value of the remaining payments, should the clients situation change.

Providers have developed trail commissions to compensate producers for their time and oversight of the annuity portfolio sub-accounts during the income stage. Some have developed a fixed payment option with an inflation guard that increases the payment by a stated percentage each year, while others have introduced a “floor” option below which variable income payments can never fall.

The key to success with immediate annuities is educating your clients on why they should be a part of their retirement income portfolio. The easiest way to do that is by comparing annuitization to something they understand:; social security or their pension. Once the mystique and misconceptions around these products immediate annuities are removed, they will prove to be a great tool in solving the retirement income needs for many clients.

If you are looking to become an expert in a market that is about to explode, look no further than the income planning/wealth distribution market and the role that immediate annuities can play in helping clients meet their retirement income goals.

Charlie Petrizzo, CMFC, is National scales Manager for First Union Insurance Group, Charlotte, North Carolina. He may be reached via e-mail at [email protected].

Reproduced from National Underwriter Life & Health/Financial Services Edition, August 13, 2001. Copyright 2001 by The National Underwriter Company in the serial publication. All rights reserved. Copyright in this article as an independent work may be held by the author.

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