At NAVA Conference, Producers Air Income Planning Strategies

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Hilton Head, S.C.

Increasingly, the question for older consumers is, how can I live on my accumulated assets once I am retired?

Two panels of producers tackled that question in various ways during a meeting here. The first panel positioned income annuities as one part of the planning solution. These panelists embedded the income annuity in the context of overall income planning discussions and approaches.

The second offered other strategies, based on panelist assessments of two sample cases. The strategies they vetted included: drawing down savings, systematic withdrawal, tax planning, asset allocation, home equity line of credit, buying life and long term care insurance, and more–but not income annuities.

Yet all panelists seemed to agree on one point–that people do need help with making income decisions.

The meeting was a retirement income conference sponsored by the National Association for Variable Annuities, Reston, Va.

Todays marketplace is much different than it was in the 1990s, observed Michael G. Maggio Jr. of Cornelius, N.C.: “I see fear on the faces (of my clients), not greed.”

A vice president and financial advisor in the Wachovia Securities Inc. bank channel program, Maggio said some of his clients start crying during the financial planning interview.

Some are upset because they dont have enough money, he explained. Others “didnt plan, or they didnt understand what they bought or why.”

The combination of depressed investment account values and nominal interest rates is hitting older people hard, agreed other panelists.

Hence, the rising interest in finding ways to live on the assets people still do have. The panelists had plenty of suggestions.

“I focus on longevity, not life expectancy, because, if you focus on life expectancy, youll be wrong 50% of the time,” said Russ Garner, the national sales manager for Fidelity Investments in Boston. He resides in Ft. Lauderdale, Fla., and sees many people there in their 90s and in good health.

Before ever discussing income annuities or other products with clients, Garner said he spends a lot of time educating customers about longevity trends. He shows a chart illustrating that the “longevity risk” is significant for modern Americans.

For instance, the chart shows the probability that someone age 65 and in good health will live to age 80. This probability is 71% for males and 81% for females. As for living to age 95, the chart shows the probability at 16% for males and 23% for females.

What about couples at age 65 and in good health? The chart shows a 36% probability that at least one spouse will live to age 95.

This information becomes the basis for educating clients on the long-term need for retirement income, Garner said.

He uses another chart to show the withdrawal rate risk, if the client plans simply to take systematic withdrawals from existing assets.

Still another chart shows how maintaining some equities in the investment allocation reduces the probability of failure for a portfolio subject to annual withdrawals. (Failure means becoming exhausted before reaching a certain age.) Garner said he shows this chart to help clients see that “being too conservative in the asset allocation is a big, big mistake.”

This serves as an entry point for discussion of alternative approaches, Garner indicated. He said he suggests the client keeps some equities in the investment allocation and uses an income annuity to secure a lifetime cash flow.

This design allows a client to “use income from invested assets for discretionary expenses and the income annuity for essential expenses,” he said.

Public seminars are the starting point for Robert J. Kahne, a senior vice president, investments with AG Edwards & Sons Inc. He is based in Sarasota, Fla.

During the seminar meetings, Kahne shows how most people take income in retirement. “They hold back on taking out money (from their IRA or other qualified assets) until age 70.5, and then they take out the required minimum distribution and hope it will last,” he said.

Then, he continued, “I point out that the most common way is not the best way.”

His prefers to see people compound their regular assets (i.e., not cash them out to cover expenses) and to use their IRA or other qualified money for living expenses.

Many people want their IRAs to be an inheritance for their children, Kahne said. However, many times, these clients are not aware of the tax treatment on IRAs or on invested assets that pass upon death. Furthermore, he said, they are unaware that “the kids are not better off getting the IRA, since most kids dont leave it there–they take it out as a lump sum.”

In appointments with clients, Kahne discusses lump sum distributions, required minimum distributions and lifetime payments. Most clients prefer taking the required minimum distributions, Kahne said, and they will “gladly” spend their pension, Social Security and interest payments. However, they are averse to spending principal, he said.

To help them consider the other options, Kahne said he goes deeply into how clients can structure monthly payments through fixed and variable annuitization. He does discuss details like single life and joint life options, the assumed interest rate, and other product matters, but he said he works hard to ensure the client understands.

Having signed documentation regarding for whom the money is intended–for example, for the clients to live on, not for the heirs–is also important, said Kahne. This way, “I can tell the kids that this is what the client wanted.”

Maggio, the producer from North Carolina, also presents the income annuity as part of the solution. In fact, roughly 5% to 10% of his business is now coming from the sale of immediate annuities, he said. That is up from very little just a few years ago.

What caused the shift? Clients started wondering where their income would come from during retirement, he said. Also, he said, some started asking, “Will I lose my money?”

Such clients have been coming into the bank where he works, seeking conservative answers that meet their needs, he added. With a 1% rate of return on their certificates of deposit, “they ask, what can I do?”

Low returns are “like arsenic” to older clients, he added.

In response, Maggio has been developing plans that are designed to enable clients to maintain their current lifestyle and have consistent income.

“I say, forget about the vacations to see the kids. Let the kids come here to visit you.” The discussions also include ways to keep pace with the rate of inflation and related matters.

Retirees in his area are very receptive to this approach, he said. They want to maintain their lifestyle, and they do not want to move or reduce their standard of living.

The income annuity becomes one of the products he uses to help achieve this goal. He said he points out that “this is not the product of the week. Its the product that solves the need.”

Thats important, he said, because “once you solve the need, the fear goes away.”


Reproduced from National Underwriter Edition, April 14, 2003. Copyright 2003 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.