Income Planning Starts To Gain Traction

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When it comes to income planning, financial advisor Richard Tanner says his firm focuses on bringing clarity to clients about what their financial independence needs really are.

The founder and president of Ownership Advisors of Cleveland, Ohio, Tanner is among experts National Underwriter interviewed on new trends in income planning strategies and products.

The main thrust right now is on “education, training and planning tools,” says William Borden Ayers, a principal of Diversified Services Group, a Wayne, Pa., consulting and research firm.

As of yet, he says, there is no universal buy-in about what income planning means, so financial industry leaders are looking at ways of raising general understanding about it. “They want to help people see that “its not how much you save but how you develop a tax-efficient income for the 30-40 years youll spend in retirement.”

Some people think income planning just means managing money, Ayers notes. “But it is not just managing money, nor is it a passive activity,” he says. It entails a different set of rules and produces a different set of solutions than are involved when people are accumulating money during the working years.

“Its a holistic planning process, and it takes a lot of work to do it right,” he says.

To help raise awareness, industry firms have been increasing their education and training activities as well as looking for tools that will help advisors and clients develop their income plans. To have an effect, those tools need to be simple and also provide objective assessments, Ayers stresses.

Massachusetts Mutual Life Insurance Company, Springfield, Mass., is among firms having such a tool. It plans to roll this out in the 4th quarter as a value-added service, available for no charge to the client.

This is a software tool that provides “user-friendly” stochastic modeling, running off of the MassMutual administrative system. Advisors can input data into it about a clients assets, timeline, risk tolerance and other factors, says Terri Forde, senior vice president of MassMutuals Retirement Savings Products Division. The system then constructs models for the customers income stream using annuities, IRAs and mutual funds.

Targeted for use with clients age 50 and up, the tool will show the effect of different product combinations and assumptions, Forde says.

MassMutual decided to develop this service because the income planning discipline is still very new to advisors and clients, she says. “The challenge they are facing is to shift from accumulation to income generation. For them, there is real value in figuring out how to convert assets to income.”

People today are facing greater longevity than ever before, Forde points out. As a result, people need not only an income stream for life but also some money that remains working in investments.

That means they also need more than one product solution, she continues. This is why MassMutuals tool reflects use of mutual funds, IRAs and annuities. “It shows people where to start and how much to put into each area.”

The company has found that people need advice in these areas. The system enables the advisor to provide this advice. The agent receives the standard compensation on the products sold.

Because this area is so new, the firm has decided to pilot test the system first before full rollout. It will also provide training and education for advisors on how to use it.

Tanner, the Cleveland advisor, is a big advocate of client education. Many clients just dont know what they need for retirement, he explains. Further, if they do have ideas in this area, often husbands and wives do not agree.

Generally speaking, the spouse who is the main wealth creator for the family tends to be more informed, Tanner says. “But how can you do effective planning if you do not have understanding and agreement between the two?” Without that clarity, he says, the process will end up being “very crudesomething like looking at the couples expenses and building from there.”

“Crude” is not good for clients, he emphasizes. It is “critical,” he says, for clients to develop some common understanding about what “financial independence” means for them.

This has an emotional side to it, Tanner says. “You just dont decide that some figurelike $1 million in the bank, or $100,000 a year in after-tax incomeis equivalent to financial independence. The clients have to determine what makes them feel securebeing in the stock market or not, having guaranteed income or not, and so on.”

Therefore, his firm explores not only the location and security of the assets that will provide retirement income, but also the attitudes toward money, how long the clients expect the money to last and how secure they want the money to be.

The issues are the same whether clients are in the high-net-worth market or, say, middle-income workers who have retired with a large 401(k) or similar qualified retirement plan, Tanner says.

The upper-income people do have more flexibility and choices, he allows, but even they have to make a plan. For example, one business owner came to Tanner after the mans firm went bankrupt, leaving him with between $4 million and $5 milliona huge drop from former years. “Thats more than enough to last for life,” says Tanner, “but the loss and the continuing stock market volatility made him feel insecure all the same.”

This perception is what the advisor needs to address, he continues. To do that, “help the clients identify the absolute minimum they will need in retirement and how secure they want that money to be. Also, be sure to explain things in a way the non-financial spouse will understand.” The product decisions flow from these decisions, he says.

Pat Condin, senior vice president, ESA Financial Solutions, Winterhaven, Fla., believes the best time to start income planning and education is when clients are young. And, he says, the best place to start is with credit history.

Credit? Thats right, he says. Lots of people are coming to his office with credit problems that result in their having to pay high interest rates on loans and mortgages or being denied credit altogether. That means a lot of money going to pay for credit that could be freed up for income planning, Condin says.

Many people just dont know how to manage credit cards, he says. They may have too many cards, too much debt on cards, too many new cards, and so on. For various reasons, they end up with credit scores (assessed by the credit companies) that are so low the person gets rejected for additional loans or financial arrangements.

Some of his clients are people who have lost their jobs during the recession and are only now getting back on their feet. Others are professionalsdoctors, lawyers, bankers, tax attorneys, CFPswho have “damaged” credit due to various problems. His approach is to start by “enhancing credit” and, once thats done, exploring with clients how to use the money freed up from their now lower payments and improved financials to build a stronger financial base.

For income planning purposes, the ideal situation is to help young clientsin their 30s and 40sto start putting some or all of the freed-up money away for their retirement income. But this works with people in the pre-retirement years, too, Condin says. “If we can improve the position and refinance at a better rate, we can put that money to work for 5 to 7 years, so theyll have something to draw on when they retire.”

Its rare to find people in their 60s today who have similar problems, he adds. “They never used credit the way boomers do.” However, if they do have credit problems, the same process helps, he says.

Among the various income planning products that are emerging are variable policies having a guaranteed minimum withdrawal benefit (GMWB).

Such features have been available on variable annuities in recent years, but now insurers have begun offering them with VULs, too, says Michael Roscoe, vice president-product management of individual life at Hartford Life. The Simsbury, Conn., insurer just debuted its own guaranteed withdrawal benefit (GWB) for its Quantum Life VUL in early August 2004.

The feature works the same in Hartfords VA and VUL policies: It guarantees that the owner can withdraw up to 7% a year from the contract, up to basis, even if the subaccount value falls below the original amount. (In the life policy, the amount available for guarantee is principal net of sales load.) Cost is 50 basis points a year.

Owners who have this feature in their VUL can withdraw the money for income purposes if necessary, and they also have a greater death benefit than is available from a comparably funded VA having a GWB, Roscoe points out.

This feature has enjoyed “tremendous popularity on the annuity side, and we think the same dynamic will apply in our VUL,” says Roscoe. Why? “Its clear that customers are looking for downside guarantees with upside participation, and we think this fits with that.”

Whatever the income planning approach, says Ayers of DSG, “the industry knows it needs to take understanding of income to a higher level.”


Reproduced from National Underwriter Life & Health/Financial Services Edition, September 3, 2004. Copyright 2004 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.