Today’s retirement planning marketplace is littered with options that offer clients an almost endless variety of retirement income combinations—so that choosing the smartest products can be a puzzling task for even the most financially astute client.

Despite this, it’s no surprise that a combination of several income planning vehicles can be crucial to maximizing the finite resources that a client has available for retirement savings.

New research provides an in-depth study of the projected financial results of various combination strategies involving annuities, life insurance and traditional investments-based retirement accounts—and the winning combination, which provides clients with both secure income and options at various stages of life, might surprise many advisors.

The Study Results

In a new study commissioned by OneAmerica, Professor Wade Pfau concluded, based on a comparison of three scenarios using different retirement income products, that a married couple would most likely maximize their retirement savings by using whole life insurance combined with a single-life income annuity and traditional 401(k)-type vehicle. 

The study examined the results, using varying market conditions, for a 35-year old couple with $65,000 in current 401(k) savings and $15,000 available for annual investment. In the median case, this combination would provide a 40% increase in retirement income over a strategy that combined only a term life policy and 401(k) investments. For a 50-year old couple with $625,000 in current 401(k) savings and $32,000 available for annual investment, the results showed a 45% median increase in spending power over the term strategy.

“Legacy wealth” was also eventually increased for both couples. Though lower in the earlier years, when measured through age 100, the 35-year old couple’s available legacy was increased by 228% and the 50-year old couple saw an increase of 451%in total available legacy dollars.

Managing Risk

The use of a single-life annuity, rather than a joint-and-survivor annuity, proved helpful in these scenarios because it allowed the couples to take advantage of higher payout rates (a single-life annuity will typically pay out more than a joint-and-survivor annuity, which must consider the risk of longevity for two lives). However, as noted in the research, the single-life annuity becomes more feasible if a whole life policy is maintained as well. 

The whole life policy in these scenarios gave the surviving spouse the ability to manage his or her own longevity risk by providing a death benefit that could be used to fund an annuity product for the surviving spouse if 401(k) assets were depleted earlier in retirement. If sufficient 401(k) assets remained, the surviving spouse would have options for preserving the insurance death benefit as a legacy for his or her heirs.

A combined annuity-life insurance strategy is also useful in managing sequence of return risk, which can prove problematic if only a 401(k)-type account is used. Sequence of return risk is a market volatility issue surrounding the order in which returns on a client’s investments occur. Essentially, if a greater proportion of low or negative returns occur during the early years of retirement, the client’s overall returns are going to be lower than if those negative or low returns occurred at a later point in the client’s (and the investment’s) lifetime. 

The annuity portion of the strategy serves to remove a piece of the client’s assets from the pool of assets that would be impacted by sequence of return risk. By allocating a portion of a client’s assets to an annuity product that provides for a guaranteed level of income, the client is able to temper the risk that the market will perform poorly in the early years of retirement, diminishing his or her asset base.

Conclusion

Essentially, Professor Pfau’s white paper uses financial data to illustrate the benefits of a well-diversified retirement income portfolio—and concludes that by adding the flexibility of whole-life insurance into the mix, the client’s annuity and investment-based vehicles can be more efficiently used throughout retirement.

Originally published on Tax Facts Onlinethe premier resource providing practical, actionable and affordable coverage of the taxation of insurance, employee benefits, small business and individuals.    

To find out more, visit http://www.TaxFactsOnline.com. All rights reserved. This material may not be published, broadcast, rewritten, or redistributed without prior written permission.

– Check out Game of Threats: Cybercrime Takes a Bite Out of the Bottom Line on our sister site Legal Tech News.

More ThinkAdvisor articles on retirement income planning research: