What have we done?

Maybe the financial services industry isn’t entirely to blame, but someone has done some serious mental damage to people. For some reason, many prospects and clients are conditioned to believe that the key to retirement is building as big a pot of money as possible and taking risks doing it.

Why else would millions of people — from chemical engineers to IT professionals to sous chefs — check the stock market every day? They have their retirement hopes pinned to those arrows going up and to the right.

But more and more people are finding out that having money in retirement and being able to use that money are two very different things. Amassing money sounds great, but what we should really be helping our clients do is create the income they’ll need in retirement. To do that, we need to understand how income streams work and how they can work together. And whole life insurance plays a big part.

We need to recondition people to keep a running tab on their projected income and encourage them to start making immediate adjustments to impact the amount of money they’ll be able to use (not have) in retirement. If we can do that, we’ll be setting up our clients to reap a far more rewarding retirement — one that isn’t plagued by the fear of running out of money or dying without leaving a legacy behind.

Industry norm

The default method of retirement preparation is the Monte Carlo model. This is where you look back at historical, rolling periods of 20 to 30 years or so to try to determine what a safe withdrawal rate might be for a client’s retirement nest egg.

Right now that rate is deemed to be about 3 to 3.5 percent. So, if you had a client with $1 million dollars saved up, he could live off $35,000 a year (indexed to the CPI) to be safe.

Preparing for retirement today has become about being safe. And even if you have a nest egg that is considered large, you could still end up living frugally and, worse yet, fearfully. The amount of capital it takes for most people to continue the life they’ve known through retirement and maintain safety and security in their assets using the traditional method is absurd.

We need to help clients understand that a massive pile of money is meaningless until they know how their money will deliver them income.

Whole life can be the guide

There are other tools that, for years, have been designed to provide income, but they’re not promoted in the marketplace. What is not presented is life insurance, and that’s a shame. With whole life, it’s not always a matter of saving more money. Many times, it’s simply a matter of deploying money already being set aside more effectively.

In a traditional scenario, if a client had built up $2 million in retirement assets and withdrew a safe 3 percent, he would live off $60,000 annually in retirement. But if the same client attempted to achieve balance between two correlated asset types — meaning he decides earlier in life to invest so that he ends up with just $1 million in retirement accounts and purchases a whole life insurance policy for the same amount in death benefit — then, at retirement, he could trade the first $1 million for an income annuity.

The objective would be a 1:1 relationship between assets and death benefit. The closer your client can get to a 1:1 relationship, the better off he’ll be. Due to costs and other eroding factors, though, this exact ratio may not be achievable.

The objective for your clients should be this close relationship between assets and whole life death benefit in retirement. If they can achieve this balance, it provides a mechanism for treating their traditional retirement accounts differently. It’s the relationship of these two asset types to each other that makes them work together in unison, allowing clients to enjoy more money in retirement while still preserving their financial security and legacy.

Even though the traditional accounts may contain fewer assets, you can use actuarial science to achieve a higher distribution rate because you’ve covered them with a death benefit that is guaranteed to be there. The income annuity, of course, stops at death, but the death benefit is still there to cover any outstanding expenses and debts and leave a legacy to heirs.

It’s an educational process — teaching clients how retirement streams work now so they know how to allocate savings. The mistake being made today is to believe the tools and strategies used to accumulate money are the same ones we should use in retirement. Again, the way most people have been conditioned to think is that it’s all about gathering assets and spinning off income. By introducing whole life into the retirement conversation, you can break this cycle.

Here’s another powerful question you can use to challenge your clients: “When you get to retirement, do you really want to have all your money in an environment where you could literally run out?” Be prepared for the answer to be “no,” and be prepared to show them the value of whole life in preparing for retirement.

 

See also:

Whole life vs. term: There’s a clear winner here

Small biz owners see harm in retirement shortfall

Boomers underestimate their longevity, LTC costs