Lifetime income is only part of the story

For people at or near retirement, an argument can be made that the retirement future they’re facing is a more complicated and risk-filled period than previous generations of retirees have faced.

Perhaps the biggest worry confronting retirees is keeping up with inflation in this current low interest rate environment, which harms a retiree’s ability to maintain their desired standard of living and grow income. It’s no secret that the U.S. 10-Year Treasury Bond has recently hit historical lows. Consider the following:

• On Sept. 6, 2011, the 10-Year Treasury Bond closed below 2 percentfor the first time–at 1.98 percent.
• On July 23, it closed at its lowest point: 1.43percentⁱ.

The question many people at or near retirement are asking is: “How long can rates stay this low?” While nobody knows for sure, it could be years as the Federal Reserve has communicated its intent to keep interest rates low through 2014ⁱⁱ. On June 20, the Federal Reserve announced the continuation of the Maturity Extension Program, known as “Operation Twist,” whose goal is to drive down long-term interest ratesⁱⁱⁱ.

We also know that interest rates have the potential to stay low for an even more extended period of time. Take Japan for example: Japan experienced an equity and real estate bubble that burst in the early 1990s. In an effort to stimulate the economy, the Bank of Japan drove interest rates to historic lows. The interest on Japan’s 10-year government bonds dropped below 2 percent on October 7, 1997, closing at 1.99 percent. On June 1, it closed at 0.836 percent^iv. That’s almost 15 years of interest rates below 2 percent.

How can a retiree get increases in their retirement income and keep up with inflation when rates may be low for many years? Clearly the challenge is great, but as financial professionals we must embrace the current atmosphere and look for ways to provide our clients with strategies for addressing these issues. This means not only offering the lifetime income guaranteed by annuities, but also the opportunity for increasing income to help successfully navigate challenges in the future.

Unique solutions are available to help your clients, especially transition boomers, keep up with risks such as rising health-care costs, inflation, taxes, market volatility, as well as historically low interest rates. If you limit the discussion to products that only offer guarantees for your clients today, you’re not providing the big picture or the hard truths that these issues can eat into your clients’ purchasing power–and quality of life–at some point in their retirement.

Lifetime income is great, but the ability to provide solutions that offer the potential for increasing income (via specific annuity contracts or additional cost riders) for your clients who are at or near retirement will truly set you apart. As retirement in America continues to become more complex, financial professionals need tools to not only help their clients get to retirement, but options that can help get them through retirement as well. Make sure you understand all of the factors involved with retirement income so you can demonstrate to your clients the crucial role you play in helping them build more retirement security.

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