Products baby boomers need most, even if they don't know it

Rely on annuities to supply some, but not all, of a boomer’s income needs in retirement, suggests Ten Haagen. For the sake of diversification, he looks to other income sources such as company stocks with a history of paying solid dividends, as well as fixed vehicles such as municipal bonds, corporate high-yield bonds and bond mutual funds built around these instruments. Given the current interest rate environment, he says, it’s wise to ladder these bond and bond fund investments and to keep durations relatively short.

Another invaluable tool for advisors in addressing boomer retirement income needs, according to Iqbal, is the expertise to manage Social Security benefits, because once boomers hit their 60s, they’ll face a litany of Social Security decisions that likely will reverberate throughout their retirement years. To elect to start taking Social payments at age 62 and have their benefits reduced later, or to delay payments until 66 or 67, or even age 70? How to best utilize the Social Security spousal benefit? And when is it wise to explore a “file and suspend” strategy? These are questions advisors with boomer clients need the know-how to answer.

For growth AND protection of assets…

For boomers who want both growth potential and principal protection, the fixed index annuity is often a viable solution. With an FIA, they sacrifice a measure of upside to gain protection on the downside, an appealing combination for boomers who lost a sizable portion of their savings during the market  nosedive of 2008 and 2009.

A relative newcomer in the annuity market, the hybrid dual sleeve annuity features a design that allows the contract-holder to purchase units of a variable annuity and units of a fixed annuity. The non-guaranteed variable sleeve is for growth, while the fixed sleeve houses guaranteed investments to support optional features such as income and death benefit guarantees.

Assuming the prevailing low-inflation environment won’t last forever, boomer retirement nest eggs also need protection from inflation risk. That protection is available, for a price, via annuity inflation/cost-of-living adjustment riders, notes Iqbal.

Equities provide perhaps the most powerful combination of inflation protection and growth potential, according to Ten Haagen. “You have to stay ahead of inflation, and equities are the best way to do that,” he says.

To address market risk while preserving growth potential, boomers often are best served allocating a significant portion of their portfolio to a diversified yet conservative array of equity investments, he asserts. “The perception is that if you’re 60 or 65 years old, you can’t take any chances, so you should avoid equities. That’s wrong. You need to account for the fact that you may live another 20 or 30 years. You have to more open to investing in equities, knowing you can be very conservative in doing so.”

Ten Haagen says he favors managed accounts for their versatility. Not only do the good ones deliver diversification to mitigate portfolio risk (with investments in equities, fixed vehicles and alternative asset classes), they also address inflation risk (via equity exposure) and income needs (via fixed investments).

To cover medical and long-term care expenses…

The boomer generation’s concern about covering medical and health care expenses during retirement is valid, given how quickly those expenses can devour a retirement nest egg. Indeed, Fidelity Investments recently projected that a 65-year-old couple retiring in 2013 will need $220,000to cover their medical expenses throughout retirement.

Accordingly, for boomers and their advisors, products that mitigate the financial risk associated with long-term care are worth a hard look, says Iqbal. One option is stand-alone long-term care insurance, which can be tailored to a range of circumstances, with varying coverage levels and a variety of moving parts.

A class of hybrid insurance products with an LTCI component represents another option. That class includes life insurance products (such as cash-value universal life) packaged with an LTC benefit. These LI+LTCI products are gaining appeal largely for their ability to use leveraged dollars to secure both life and LTC coverage. If the policyholder never needs long-term care, that money stays inside the policy, to eventually pass to beneficiaries on a tax-favored basis.

“The market for these products is growing very fast,” says Iqbal, citing an increase in annual premium from $455 million in 2007 to $2.5 billion in 2012.

Perhaps those numbers suggest baby boomers have begun to pay more attention to their retirement needs after all.