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Can Guaranteed Minimum Income Benefits Help Save Your Clients' Retirement Dreams?

By staff Writer

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The financial services industry is all about opportunity. Where do we focus our time, energy and resources to make the biggest impact? Where is the opportunity tomorrow that we can plan for today?

Well, there may be an opportunity you haven’t yet realized, but by the end of the year, many agents will be ready to capitalize on it.

Let’s begin with a quick story:

A couple — Michael and Barbara Clark, let’s call them — have been referred to you from one of your ideal clients. They are a picturesque, healthy, and vibrant couple who are on the brink of retirement. At age 61 and 60, respectively, they’ve saved diligently for retirement, making sure to always live within their means. Working together, Michael and Barbara have a crystal-clear vision of what their next 30 years should look like: a simple country club membership for golf, tennis, and social events; increased time with children and grandchildren; and an occasional vacation to places they’ve never seen, only read about.

But as Michael and Barbara sit today in your office, it’s evident that something is wrong — and after a couple of questions, it’s painstakingly obvious. Their retirement portfolio is down 32 percent from a year ago, and this couple in front of you is lost in retirement planning. They must now make a decision that can be very tough to swallow. Do they retire now with a lower standard of retirement? Or do they delay retirement and build their portfolio back?

And there’s your opportunity.

According to U.S. News & World Report and the Boston College Center for Retirement Research, equities have declined $9.8 trillion since last year. Some of that affected commercial banks and insurance companies, but $7.2 trillion hit Main Street portfolios, either directly or indirectly. Approximately $2 trillion of losses this past year directly struck 401(k)s and IRAs. We’ve repeatedly heard the baby boom generation referred to as the biggest demographic force in American history — and 78 million baby boomers are fully participating in $7.2 trillion of equity losses. Michael and Barbara Clark are far from alone in their situation.

To envision how this will develop in the future, we must first look into the past. Our most relative statistics from the extended bear market of 2000-02 may be able to shed some light. Here are the market value declines from that period:

Index Market peak (2000) August
2002		 Percentage change (2000-02)

S&P 500

 1,527 916 -40.0%
Dow Jones 11,723 8,664 -26.1%
NASDAQ 5,048 1,315 -74.0%

Source: Author’s calculations using online data from Dow Jones & Company Inc., Standard & Poors, and The NASDAQ Stock Market Inc.

Note: For Market peak values, S&P and NASDAQ data are from March 2000; Dow Jones data are from January 2000. At the peak of the most recent business cycle in March 2001, the values for the major stock indices were 1,160 for the S&P 500, 9,799 for the Dow Jones, and 1,987 for the NASDAQ.

Even more important for your opportunity is realizing the impact that market losses and the weakening economy of 2000-02 had on the job market. The Center for Retirement Research at Boston College published its findings about this exact topic; responding to the bear market, the labor force participation rate for older workers (ages 55-64) jumped two percentage points — an increase unprecedented in post-war U.S. economic history. In past recessions, we’ve typically seen slow, or even negative, growth in labor force participation. But this time it was different, as the steep decline in market indices may have caused some older workers to postpone retirement and convinced other early retirees to rejoin the workforce.

The study also asserts that past generations of workers with defined benefit plans were largely insulated against the volatility of the equity markets, particularly in their last few years before retirement. The firms for which they worked bore the brunt of risk in pension funding. A worker’s pension was traditionally determined by salary and years of service, not market performance. But in the marketplace of 2002 (and even more so today), workers must rely on their own investment planning within defined contribution plans.

Older workers within defined contribution plans are required to make incredibly important decisions that will affect the quality of their retirement lifespan. Of course, they could protect themselves from unnecessary market risk as they near retirement, shifting from equity-based investments to more risk-averse vehicles, but how many individuals have this knowledge? And how many of the knowledgeable put such a widely recommended strategy into action? In theory, it’s simple, but in practice, the majority of investors fail to follow this model — meaning they retain significant risk.

Even though your clients have investment risk during their working years, they still come into your office looking for the predictability of a monthly income stream that can keep them ahead of inflation. Defined benefit pensions are no longer an option, so what is your solution?

Your answer should never expose the client to losing control of their money or to excessive risk and/or fee structures. But what if you could show each client a worst-case guaranteed income scenario, while guaranteeing control of the money, eliminating market risk, and drastically limiting fees?

You can do all that with guaranteed minimum income benefits (GMIB). Offered through annuity carriers, these benefits have radically evolved over the last two years; some will even guarantee an inflation hedge in the future for no extra cost. Pension plans are all but dead, and clients may need an income solution to pick up the slack.

Fast forward to the fourth quarter of 2009. Michael and Barbara Clark are back in your office, and they look much better than when you them two to three months ago. There is a certain glow about them, and as you get further along in your conversation, they talk about the last couple of months and how hard they’ve studied their options. Together, they planned more than ever, crunched every number you gave them, and even started looking into that country club membership again. As you’ve laid out a financial plan to carry the Clarks through retirement, what do you think they’ll be most mindful of? How influential will the memories of the last two recessionary markets be? How much risk do you think they’ll want embedded in their portfolios? For your business, how many of the 78 million baby boomers are just like the Clarks?

Matt Neuman is vice president of marketing for the independent marketing organization Advisors Excel. He can be reached at [email protected] This email address is being protected from spam bots, you need Javascript enabled to view it or 866-363-9595.

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