Producers can look forward to greater sales in the year ahead, thanks in part to current demographic trends and a loosening of federal regulations governing annuities and individual retirement accounts, according to experts.
“Boomers are turning age 60 every 10 seconds,” said Michael Berry during a workshop here, which was part of the annual Advanced Sales Forum of LIMRA International, Windsor, Conn.
“These folks are only 10 years away from having to take their required minimum distributions, so the opportunity to help them with their income planning needs is now,” said the manager of advanced annuity sales at ING Americas-U.S. Financial Services, Windsor, Conn. Annuities should factor into that planning, he indicated.
As boomers continue to exit the workforce, such opportunities for advisors will only expand. An Investment Company Institute report on the role of individual retirement accounts and cited by Berry estimates IRA assets at $4.8 trillion and the defined contribution planning market, including 401(k), 403(b) and 457 plans, at $4.5 trillion.
Most of these assets ultimately get cashed out, either because of federally mandated required minimum distributions or because of financial circumstances. Forty-seven percent of all IRA withdrawals, the report notes, are a result of the age 70 1/2 RMD requirement. Meeting living expenses accounts for another 20% of forced withdrawals.
Too often, income distribution planning gets postponed until the last minute–with potentially adverse consequences for the client, Berry told the workshop.
“A lot of advisors wait until age 70 to discuss income planning with clients,” said Berry. “But clients really need to start their RMD planning at least 5 years prior, at age 65. That will allow not only for continued wealth accumulation but also better position retiring couples to extend their RMD distributions over 2 or even 3 decades.”
Such long periods of retirement are no longer a stretch. Berry said that among married couples age 65, there is a 50% chance that one or the other spouse will reach age 92. The probability declines to 25% and 15%, respectively, for death at ages 97 and 100.
Longevity risk–the possibility of outliving retirement savings–increases not only with age, but also with excessive withdrawals from retirement savings. Many advisors, Berry said, assume an annual withdrawal rate of 4% or 5% to be “safe,” meaning the client will have some savings remaining at death. Yet, a hypothetical client at year-end 1972 holding $500,000 in investments, divided evenly between large company stock and 50% intermediate term bonds, runs out of money within 24 years, assuming a 5% withdrawal rate. As the withdrawal rate increases to 6% and 8%, funds are completely depleted within approximately 15 years and 10 years, respectively.
“Given a portfolio that’s invested 80% in equities and 20% in bonds, a 5% withdrawal rate will yield a 31% chance that the client runs out of money before he or she dies,” said Berry. “Does the typical senior want to take a 1-in-3 chance of running out of income? I think not.”
He added that clients can best address longevity risk stemming from RMD distributions by converting the IRA to an annuity offering a guaranteed 5% income stream for life, along with a rider that allows for RMD distributions exceeding the 5% rate.
Thus, an insurance carrier would pay out the higher of the RMD or the contractual 5% for life, without causing any benefit reduction. Using a hypothetical example, Berry observed that an 83-year-old who takes an RMD of $84,500 against an account balance of $1,377,343 surpasses the maximum annual withdrawal amount of $72,676–an excess distribution of 16.27%–yet suffers no reduction in the MAW for the next contract year.