It’s well known that retirement planning aims to develop a plan that provides enough retirement income for the client’s lifetime.
This is a difficult task at best, as there are so many unknowns to each retirement. What’s more, once a client starts planning to enter retirement, advisors have to change focus–from advocating for accumulation to supporting asset preservation over a long period. Advisors need to be ready to have these discussions and be comfortable speaking to clients about current income, expected income, total assets and how to handle health care expenses that may arise.
What can make all this planning not quite so straightforward is trying to anticipate the impact of the future economy and of significant health care expenses on hard-earned retirement assets.
Protecting these assets against the effects of inflation is a growing concern, due to inflation’s detrimental effects on individual finances, buying power and accumulated wealth. The unpredictable nature of inflation can easily and quickly start to wear down assets if no plan is in place to help combat it. Undoubtedly, many baby boomers remember the soaring inflation of 1973-1982, when prices more than doubled and the inflation rate peaked at 13.58% in 1980. If there is a repeat performance in the near future, can clients’ current retirement nest eggs withstand it?
Adding inflation protection riders to fixed-income annuities is one solution that can help.
Immediate fixed-income annuities have always been practical financial vehicles for helping clients shore up basic living expenses–food, utilities, housing, long term care–with a steady stream of income for life. Now, fixed-income annuities with inflation protection riders can help guarantee that not only will clients not outlive income, but that they’ll be better able to maintain a quality of life in retirement consistent with expectations.
With inflation protection riders, payments are often linked to the Consumer Price Index, which tracks prices of goods and services and is an indicator of inflation.
With a CPI-option annuity, retiree accounts automatically update payment amounts at each year’s start. The inflation adjustment rates usually don’t have a cap, so even if the cost-of-living index goes up, the client’s payments go up as well. And, if the CPI goes down, the payment amount will go down, but usually never lower than the original payment amount selected.
While inflation protection has always existed with other retirement funds like Social Security and pensions, this is a relatively new and innovative concept for fixed annuity products. Because of this, clients may have initial objections regarding how these products fit into their overall retirement plans. Here are some common concerns and ways to respond:
Objection: “I already have a broad retirement portfolio and don’t see the need for an income annuity.”
Answer: Re-emphasize that an annuity is the only financial tool that can provide a guaranteed supply of income for life. If the client wants the highest guaranteed payment stream for the premium dollar, the client could purchase a life-only immediate annuity. Point out that riders on deferred annuities can provide guaranteed lifetime payments, but the payment amounts are smaller and they are not CPI protected. Similarly, a financial plan that relies solely on systematic withdrawal to liquidate assets, no matter what parameters are used, is no guarantee against outliving the money.
Objection: “The average annual inflation from 1980 to 2006 was 3.8% a historically low rate.”
Answer: Note that even the current inflation rate levels are still high enough to cut a dollar’s buying power almost in half over that 26-year period. Meanwhile, with increased life spans, people can plan to spend between 20 to 30 years in retirement. If inflation is not factored into this duration, retirees may face difficult decisions related to loss of income, including whether to lower their current standard of living, re-enter the workforce or rely on family members for financial support.
Objection: “If the CPI/inflation rate goes down, the payment amount may be adjusted down as well.”
Answer: Mention that fixed-income annuities provide protection against losses experienced by investments subject to downturns in securities values or losses in financial markets. Note that if the client invests directly in the market instead of buying an inflation protected annuity, he/she bears the full risk of the market.
Inflation-adjusted income annuities are a safe, smart retirement income vehicle, especially for today’s clients who, though increasingly educated, still need the help, support and guidance of a trusted advisor. These products offer a simplified approach to helping manage retirement finances while maintaining the peace of mind that clients will not outlive assets or have to sacrifice standard of living.
Michael Harrison is vice president in the annuity profit center of AIG American General, Houston, Texas. His e-mail address is: email@example.com