While today’s seniors—and the media—may not trumpet their retirement-related issues quite as loudly as the boomers, the challenges they face with regard to tax efficiency, retirement income, long-term care and inflation risks, wealth protection and wealth transfer are no less real and no less urgent.
Indeed, because they’re older and already in retirement, one could argue those issues are more pressing for seniors than for boomers.
“Issue number one” for advisors serving senior clients “is getting their attention,” says John Freiburger, CLU, ChFC, AEP, managing partner at Naperville, Ill.-based Partners Wealth Management.
“It’s important to help them understand that they are going to be around for 20 or 30 more years, and that they need to plan accordingly. They can’t afford to be 100 percent invested in fixed income products, for example. They need a plan to get them through retirement.”
Not only must seniors pay heed to their needs, they also rely on advisors to pay attention to the types of tools and tactics available today to address the key issues they face.
Here’s a look at some of the products and strategies advisors are leaning on to help carry their Silent Generation clients through retirement. Because, whether they know it or not, and whether the media says so or not, seniors need solid advice and planning as much as boomers do.
Seniors who need a guaranteed income stream and who are earning virtually nil on money parked in a fixed vehicle such as a CD may be better off putting that money in some type of annuity, such as an immediate annuity or its increasingly popular cousin, the deferred income annuity (DIA). Similar to a single-premium immediate annuity, a DIA starts providing income on a deferred basis, five, 10 or more years down the road, so it can be timed to kick in when another income-producing source dwindles.
“Something like an immediate annuity doesn’t earn a lot,” observes Freiburger, “but it guarantees X number of dollars every month and frees you to focus on growing other parts of the portfolio for the longer term.”
Like Freiburger, Renee Porter-Medley, CFP, senior financial planner at Key Private Bank in Naples, Fla., is tepid on bonds and bond funds when it comes to fixed income vehicles, though both say they occasionally still use them in senior client portfolios. For higher (though still very modest) returns, Porter-Medley may turn to lower-credit-quality bonds and bond ETFs, which have lower expense ratios. Meanwhile, the bonds and bond funds Freiburger does steer his clients toward are “very short-term” to address interest rate risk. For tax efficiency, he’ll often use corporate bonds for qualified money and municipal bonds for unqualified money. Whatever the case, in today’s market, yields are going to be very modest by historical standards.
The low-yield environment is prompting advisors like Freiburger and Porter-Medley to turn to alternative asset classes to generate fixed income for senior clients. “Some of these alternative investments put out a very consistent dividend in the 4 percent to 7 percent range,” notes Freiburger, naming real estate investment trusts (REITs), hedge funds, funds of funds, leasing deals and energy projects among the alternatives he uses most often. Commodities, along with real estate, are two alternative asset classes Porter-Medley favors for her senior clients.
Given the breadth and variety of these asset classes, and the complexity of some of these vehicles, due diligence is critical—and time-consuming, he says. “It takes a lot of work on our end to stay on top of [alternative asset classes]. It’s also a lot of work on the client’s end…to become comfortable with” alternative investments.
Freiburger says he sometimes steers clients toward indexed universal life insurance for its ability to address multiple needs tax-efficiently, including income, principal protection and wealth transfer. “It’s a longer-term type of investment that’s not going to provide the returns of an equity portfolio, but it is going to give you income and a pretty reasonable return.”
A variable annuity with a guaranteed income rider that kicks in at some point in the future is another option to consider, particularly if a client is willing to take on a bit more risk for more upside potential.
In certain situations, such as when a senior has a life insurance policy they no longer need and/or they have an urgent liquidity need, the life settlement option—in which a life insurance policy is sold on the secondary market—may be worth exploring to create an immediate income stream. A reverse mortgage is another alternative for seniors in need of a cash infusion.
TO ADDRESS THE RISK OF NEEDING CARE