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April 03, 2012 at 11:00 AM
With the crazy financial markets of the past decade, most boomers feel that a storybook retirement is no longer possible. Having suffered huge losses in the stock market, they’ve withdrawn all their money, waved the white flag and are thinking about moving all their investments into a CD that pays less than one percent interest. This approach is crazy, and as advisors, we cannot let this happen. Our industry was built for markets like the one we are in now. We have simple solutions to today’s most complex retirement challenges. With our help, boomers and seniors can still have the retirement of their dreams.
Retirement is now primarily a twofold challenge. First, retirees need guaranteed income more than ever, but fewer people have it than ever before. In the Social Security program, there is about to be a massive shift from people contributing to the program versus people taking money out, which is likely to lead to reduced benefits. As for pensions, unless your client works for the state or federal government, this benefit is probably no longer offered.
Second, in an age of market instability, seniors need to eliminate or protect against retirement risks. As an advisor, it’s your job to educate them on market risk, withdrawal rate risk, inflation risk, deflation risk and order of returns risk. For instance, many clients are primarily concerned with average returns. They understand that a 5 percent return is better than 3 percent and a 3 percent return is better than 1 percent. However, what most of your clients don’t understand is that the day they retire, all the rules change. A loss in the years immediately before or after they retire can devastate their portfolio and their ability to generate income, regardless of average returns. With this in mind, it’s order of returns that they should be most concerned about.
However, the number-one risk clients need to account for is longevity. If you take a husband and wife who are both 65, there is a 50/50 chance that one of them will live to age 92. There is a 25 percent chance that one of them will live to 97. While an increase in life expectancy is a good thing, it’s also created a big problem for retirees because longevity risk is a risk multiplier. The longer people live, the greater the chance their portfolio will be impacted by inflation or deflation, or that they will run out of money. Also, the risk of needing long-term care skyrockets the longer someone lives.
Therefore, in order to retire optimally, clients have to take longevity risk off the table. This cannot be done with stocks, bonds, mutual funds, hedge funds or money managers. The optimal way to do this is with a lifetime income annuity (lifetime SPIA) or a deferred lifetime income annuity (longevity insurance). While a variable annuity with living benefit can play a role, it is a suboptimal solution to cover basic expenses since the payout will likely be significantly lower than a lifetime income annuityespecially if your client is older.
Because only the life insurance industry can protect people from the financial impact of dying too soon or living too long, it literally has a monopoly on solving this crisis. The risk when a life insurance company sells a life insurance policy is that someone dies too soon. The risk when they sell a SPIA is that someone lives too long. Since they are on both sides of the longevity risk, they can neutralize longevity risk to themselves and to the client. Money managers cannot do this.
Guaranteed paychecks or “play checks” for life
In a world of limited Social Security and vanishing pensions, guaranteed lifetime income is vital to seniors. The lifetime income annuity (LIA) can make their worries go away by guaranteeing them paychecks or (if they already have that covered) “play checks” for life.
