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Cracking the Retirement Income Code

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The year 2011 was the advent of the retirement crisis in America. As we move forward into 2012 and the next several years, an unprecedented number of Americans will enter into retirement, 79 million to be exact. However, the majority of them are financially ill-prepared for retirement. Baby boomers face numerous retirement income challenges, many of which are unique to their generation.

As this generation enters retirement, we are seeing growing uncertainty among the sources of retirement income that have traditionally been heavily relied upon by retirees, such as Social Security. On top of that healthcare costs continue to increase and will continue increasing in the coming years. The life expectancy of baby boomers exceeds that of previous generations and in turn they will be spending more time in retirement than previous retirees, thus requiring retirement savings to last over a longer period of time.

Given these factors, it’s not surprising that recent studies by the Insured Retirement Institute (IRI) found that the top concern of nearly one-third of boomers is having adequate retirement assets, and over half said they plan on working in retirement for income. Yet it is not necessary for boomers to sacrifice their retirement goals. With proper planning and guidance from a financial professional, this generation can crack the retirement code and retire with financial security.

Social Security Instability

Social Security has traditionally been a major source of retirement income for retirees, and Americans have come to rely upon it to cover many essential costs during retirement. However, over the past several years we have seen decreasing solvency of the fund. In 2010 and 2011, for the first time since the program’s inception, retirees did not receive a Cost of Living Adjustment (COLA) in their Social Security checks. Yet they still shouldered the burden of inflation and increasing medical costs. In 2012, retirees will receive a COLA, however much of it will be negated by the increase in Medicare Part B premiums.

Still many Americans nearing retirement plan on Social Security providing for a majority of their income throughout retirement. More than four out of 10 baby boomers cited Social Security as a major source of retirement income with 51 percent of older boomers anticipating it to make up a significant portion of their retirement income.

Rising Healthcare Costs

The cost of healthcare climbs higher and higher each year, often outpacing the rate of inflation. Between 2000 and 2009 alone, medical and prescription costs, health insurance premiums and deductibles rose nearly 150 percent. At these rates the high cost of healthcare will become greater and is a significant factor that Americans must account for when considering how much they need for retirement. A study by the Center for Retirement Research at Boston College found that a couple who are both 65 can expect the cost of healthcare for the remainder of their lives to be $260,000.

Sadly, nearly 50 percent of boomers believe they do not have enough money to cover these expenses during retirement. This leaves many of them questioning their ability to ever fully retire.

Increased Life Expectancy

Not only are today’s pre-retirees facing the challenges of Social Security instability and mounting healthcare costs they are also living longer making the time spent in retirement longer. Half of today’s 65-year-old men are expected to live until age 85 and half of women 65 years old or older are expected to live to age 88, thus baby boomers could spend roughly 20 years or more in retirement. Consequently, this generation will require more savings and to make their retirement savings extend over a longer period of time than previous generations.

Building Your Client’s Future

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While the aforementioned challenges pose a significant threat to one’s retirement income, through proper financial planning and the help of a financial advisor, baby boomers can decrease the impact of these risks to their financial security in retirement.

When planning for retirement, like most daunting tasks, the first steps are often the hardest. As a financial professional, help your clients begin the process of developing a retirement income strategy by working with them to take two important steps.

First, have your client review his or her assets by identifying the accounts in which they have money and which assets they plan to use for retirement income. The client should identify current income sources, such as Social Security and pensions, to provide a starting point and to help set goals for the future.

The second step you can take with your client is to help them identify essential (i.e., food, shelter, utilities, etc.) and non-essential expenses. This will help evaluate which retirement income strategy is best for your client. Investors often prefer to cover essential expenses with guaranteed income products and non-essential expenses with non-guaranteed products and strategies.

Once these steps have been taken you and your client are able to best figure out which strategies are the best choice to help your client achieve their retirement goals and maintain financial stability throughout retirement. IRI’s retirement income guide, Building Your Future, explains three different retirement income strategies: investment and income planning strategies, insured income products and income-producing investment products.

Investment and income planning strategies are used with the underlying investments. This strategy includes a number of different approaches including systematic withdrawal plans (SWPs), the bucket approach, the risk-adjusted total return approach, the income floor/hybrid approach, bond ladders, laddering a CD portfolio and reverse mortgages. The majority of these approaches generate cash flow through a combination of high- and low-risk investments in a highly diversified portfolio.

If your client is concerned about the market risks and volatility that accompany the investment and income planning strategies, then they may want to consider insured income products for retirement income. These include variable annuities with guaranteed lifetime withdrawal benefits, single premium annuities, advanced life deferred annuities and long-term care. These products offer the predictability of a steady income stream and help protect against longevity risk and market risk.

Lastly, income-producing investment products are common investment products that are designed to produce income; however, income levels may fluctuate due to associated market risks. These products include income-distributing mutual funds (i.e., maturity date managed payout funds, endowment managed payout funds, dividend-paying mutual funds and TIPS mutual funds), dividend-paying stocks, preferred stocks and real estate investment trusts (REITs).

By working with your client to create a diversified retirement income plan utilizing the three previously described strategies, they will be better protected against the financial risks and challenges retirees face.

For more details about the different retirement income strategies discussed here get your copy of the Insured Retirement Institute’s client-approved retirement income guide, “Building Your Future,” and the supplemental matrix, “Retirement Income Strategies & Products at a Glance,” at

Cathy Weatherford is president and CEO of the Insured Retirement Institute.