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The recent three-year bear market may have had only a minimal impact on the investment portfolios of older retirees who were conservatively invested. But these retirees are now facing a new set of problems planning their retirement income. The impact of inflation, the possibility of outliving their assets and the measly returns they are getting on their fixed investments are all challenges for planners who specialize in the post-retirement planning market.

Many retirees admit they are living longer than they expected, and long-term inflation is really taking its toll, says Steve Bowlds, president of Retirement Benefit Advisors, Sand Springs, Okla.

“Even though we had low inflation through the 1990s, it still has a cumulative effect. The problem retirees are facing today is that they are living much longer in retirement than they anticipated at the time they retired,” he explains.

Retirees may be spending as much as 25-30 years in retirement, so retirees that Bowlds started working with in 1979 are now in their 24th year of retirement.

“The buying power of the money they had when they retired has eroded to purchase probably 60% of what it could buy back then,” he says.

Furthermore, the downturn in interest rates and yields on fixed investments is squeezing retirees who are holding on to conservative vehicles like certificates of deposit.

“Its a major concern for people in post-retirement who invest conservatively and just try to live off interest,” says Joseph T. Molony, a financial representative of the Northwestern Mutual Financial Network, Lancaster, Pa.

Molony recommends that younger retirees create a balanced portfolio that will generate the income they need for a long retirement. He suggests an “ideal portfolio allocation,” which is a function of the assets available for investment.

For example, when working with a client who may have $2 million of investable assets to work with, if they only need $100,000 a year through retirement, their portfolio only needs to generate a 5% annual return. “Their risk tolerance only has to be as high as necessary to sustain their standard of living given the amount of invested funds they have available,” says Molony.

But older retirees who have a lot of money invested in CDs have seen returns drop to as low as 1%, says Robert A. Kaiser, president of Kaiser Financial Group, Fanwood, N.J. “The CD money has really hurt senior retirees.”

A strategy Kaiser has recommended to retirees who are looking to increase their income generated by CDs is to use two insurance products–a life annuity and life insurance.

An 80-year-old client of Kaiser had a CD that was generating income of just over 1%. By moving this money into an immediate annuity with lifetime income, her annual income increased to about 10%. “The yield on that is very high,” he says.

Of course, the problem with a lifetime annuity is upon death there are no proceeds payable to heirs, Kaiser explains. If his client passed away in the next couple years, Kaiser knows he would have some very angry heirs to deal with.

But this is where the next part of the plan comes into play. His client can purchase a life insurance policy to replace the principal spent on the annuity–using the annuity income to pay the life premium, he says.

In this situation, his clients income increased significantly, it was guaranteed for her life, and the principal was replaced with life insurance for her heirs, he says.

This strategy may even work for someone who is rated a substandard risk, Kaiser continues. “If youve got a table D or F, shell get a higher lifetime payout on an [impaired risk] annuity, which will help cover the extra cost on the life policy,” he says.

Other byproducts of the low interest rate environment are the dividend insufficiencies and low universal life interest rates now found in older life insurance policies. Retirees who own underperforming insurance policies are finding they have to either drop death benefits or increase premium payments, explains Roger Bozarth, president of The Insurance Advantage, Orlando, Fla.

For these individuals who are in good health, it may make sense to consider a new type of policy. “The premiums on new policies keep dropping and guarantees keep getting betterthats a big boost for a lot of people.”

For example, Bozarth says, if a retiree has a permanent life insurance policy that has been in force for 10 years and it has underperformed, it may only provide coverage to his or her age 85, unless a premium increase of 20% is paid every year. Replacing that policy with a new one guaranteed to age 100 may make more sense, he says.

“From their perspective, that takes away at least one of the uncertainties in their financial planning,” he says.

A technique Bowlds uses when planning for retirees is to search for what he refers to as “hidden assets.” Many retirees, he says, dont even realize they have hidden assets.

One of his retired clients, Bowlds explains, contacted him to surrender an annuity contract worth $37,000. She needed some cash to pay off a home equity loan as well as some credit card debt. At age 79, she had been working part-time, but she was still unable to service all her debt. The annuity was her most substantial asset and was subject to surrender charges, so Bowlds went to see her.

“In her case, her hidden asset was her home,” he says.

Her house was worth $140,000, so Bowlds executed a reverse mortgage.

A reverse mortgage gives retirees the opportunity to take some of the equity theyve built up in their home out as cash–while maintaining residence.

Upon accessing the equity in her home, Bowlds explains, the client paid off all her loans–which included almost $30,000 in credit card debt. She was still left with more than $40,000 in cash that could be invested. Furthermore, the $37,000 annuity is preserved, and she is able to stay in her home for the rest of her life.

In some instances, Bowlds has had his retired clients take the hidden equity out of their homes and reposition it into a single premium life insurance contract, which can help leave a larger legacy to heirs. “Why leave that equity in there until they die, when we could take that equity out and do some creative planning,” he says.


Reproduced from National Underwriter Life & Health/Financial Services Edition, August 4, 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.