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 Having suffered huge losses in the stock market, they’ve withdrawn all their money, waved the white flag and are thinking about moving all their investments into a CD that pays less than one percent interest.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 annuity—especially 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.
“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.”
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.
There are so many benefits to clients investing in a SPIA, but here are just a few of them. First of all, let’s compare the lifetime income annuity to another popular investment: the CD. The average rate of return on a one- or two-year CD is presently less than 1 percent. It would take 72 years for a client to double their money. What are your clients going to do with this paltry rate of return? Buy a dinner at Bertucci’s and some movie tickets? CDs were never made for income. The LIA typically offers a far better payout rate and is a superior income vehicle since it pays principal, interest and mortality credits. Many LIA products offer a period certain option so that beneficiaries will continue to receive income payments in the event the person purchasing the annuity dies prematurely.
Another great benefit of the lifetime income annuity is that it can help repair bear market damage. In the past few years, many retirees suffered severe losses due to the market downturn. Many saw their accounts depleted by hundreds of thousands of dollars in what felt like an overnight drop. Consider a scenario where a couple’s portfolio dropped from $600,000 to $400,000. In this situation, they could keep $100,000 liquid in case of an emergency and then move the other $300,000 into a joint lifetime income annuity. This strategy will provide considerably more income for life than a CD and, if the entire $400,000 is put into a joint life contract with a 30-year-term certain, it can guarantee back all the money they had at the top of the market.
The deferred lifetime income annuity (longevity insurance) is the other way for clients to take longevity risk off the table. Unlike the SPIA, payouts can be set up to start over varying timeframes. You can use laddering of deferral periods to optimize the client’s income needs. For example, in their 50s, clients could set up an annuity with a 10-year deferral and receive income at retirement age. Then, at age 60, they could purchase a new annuity with a 20-year deferral and receive bigger payouts in the later stages of retirement.
In addition to the guaranteed death benefit and step-up provision that many deferred annuities have, more and more carriers are offering guaranteed living benefits such as accelerated payments in the event nursing home care is needed. Although these guarantees are constantly changing due to market developments, the key for advisors is to stay current with the different offerings. One of my personal favorites is using the Guaranteed Minimum Accumulation Benefit rider on a variable annuity. With this rider, your clients can choose their funds, invest in the market, capture the full upside, but they are guaranteed not to lose a penny over a certain period of time—normally 10 years.
Also, as you’re most likely aware, another huge advantage of the deferred annuity is that while the client’s money is growing, before payments begin, there are no taxes to be paid. It grows tax-deferred and all transfers are tax free as well.
Solving the boomer retirement crisis one case at a time
Few advisors truly understand that the insurance industry has a monopoly on solving the baby boomer retirement crisis. Retirement needs have changed: With the volatile markets of the last few years, most retirees now need guarantees that they won’t run out of money. They need to eliminate or protect against market risk and be able to pass their hard-earned money to their spouse when they are gone, and then on down to future generations. Thankfully, for all 78 million baby boomers across the United States, the insurance industry and the financial tools senior advisors offer were built to solve exactly these issues.