With a few notable exceptions, many baby boomers are facing a long retirement or semi-retirement with fewer resources than they had during the working years. So they need to make the most of the retirement benefits they will actually receive.
For now, that means maximizing Social Security and, in many cases, considering the use of a fixed immediate annuity. And that means making important choices about Social Security income. Advisors in the income planning market will need to help boomers make these decisions. Here are some of the key issues to cover.
Running on empty. With the average longevity of American men and women on the rise, boomers need to plan for a long life. While that’s not a new idea, most planners need to help clients understand the importance of income planning for many years. The advantage of maximized Social Security income and the use of annuities as the income portion of a time-weighted portfolio will make sense for most clients.
Historically clients have been reluctant to use annuities for retirement income. However, recent economic uncertainty and the realization that people could live longer than expected could begin to turn clients toward the light.
The best way to show an immediate fixed annuity to retired clients is as a component of a time-weighted asset allocation, not as a total retirement income solution. This approach helps get around the objection about having to give up a retirement lump sum by tying it up in an irrevocable financial vehicle.
Guaranteed enhancements, like cost of living adjustments and return of premium on cancellation, can help alleviate concerns, too. Some annuities also offer increased payments if a person enters a nursing home or is diagnosed with a life-threatening illness. Some even offer a death benefit. And the tax benefits of annuities can be appealing. These types of perks, which allow a client’s money to serve double-duty as a protection vehicle, make the immediate annuity product more client-friendly than the typical deferred annuity.
The chart provides an example of how dramatically an immediate annuity can increase the longevity of a retirement portfolio for a 65-year-old man who plans to take out 4% a year for retirement income. The chance of the money lasting to age 100 is as high as 96% if the assets are evenly split between a lifetime annuity and a stock/bond portfolio; the percentage is lower when the annuity provides a smaller percentage of the income .
Waiting to maximize benefits. As mentioned previously, the decision of when to take Social Security income can also have a big effect on payouts, especially if the client is married and has a spouse who did not earn a substantial living by comparison.