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The Retirement Planning Trifecta

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What You Need to Know

  • Annuities can offer income guarantees.
  • COVID-19 has increased uncertainty.
  • The author says advisors who can help clients with annuities have a way to address that new uncertainty.

For many clients, retirement planning means facing the unknown — from how long they’ll live, to how long their savings will last. COVID-19 created even more uncertainty, as one-in-five American adults said the pandemic had forced them to delay their retirement or no longer retire at all, according to Nationwide’s 2021 Tax-Efficient Retirement Income survey.

With so many Americans uncertain about their ability to retire and unsure about what comes next, advisors and financial professionals play an important role, on the practical level and the emotional level as well. In fact, according to our sixth annual Advisor Authority study, conducted in 2020, the number-one reason investors work with an advisor or financial professional is to feel more confident in their financial future, and the number-two reason is concerns about saving enough for retirement.

To help clients have the confidence they need to prepare for the unknown, consider a holistic financial plan that includes the “retirement planning trifecta” — protection, guaranteed income and the power of tax deferral.

The Importance of Protection

According to Nationwide’s advisory authority study, losses due to the pandemic, protecting assets and managing volatility were investors’ top three financial concerns. While equity markets have recovered since the pandemic, protecting a portfolio against future market downturns and volatility could mean the difference between retiring as planned — or waiting for years. Yet only 64% of investors had a strategy to protect their assets against market risk, compared to 91% of advisors and financial professionals. Clients could use your help.

Annuities can be an effective option to help clients prepare for retirement, providing the upside potential they want, to help them accumulate more, and the downside protection they need, to preserve their portfolio. Because all guarantees and protections are subject to the claims paying ability of the issuing insurance company, it’s important to identify an insurer with superior ratings and financial strength.

To help balance growth and protection, registered index-linked annuities (RILAs) may work for clients with a range of different risk profiles. RILAs offer clients upside potential based on the growth of an underlying stock market index. These could include traditional indices such as the S&P 500 or Nasdaq 100, as well as specialty indices that dynamically allocate assets, manage volatility and use other unique strategies. This is balanced with different degrees of protection against market risk — including a buffer for moderate to aggressive clients, or a floor to provide a more defined level of protection for conservative to moderate clients.

The Need for Guaranteed Income

Nationwide’s advisory authority study also revealed that protecting against outliving savings and generating guaranteed income in retirement were top priorities for investors, with four out of five saying they had a strategy to do both. But citing Social Security and defined benefit pensions plans as their top two solutions, investors may have a blind spot — and face a shortfall — when it comes to meeting their retirement income needs.

To help ensure clients won’t outlive their savings in retirement, annuities are the only product that can provide guaranteed income for life. Annuities can supplement other sources of retirement income or help bridge an income gap before Social Security starts. Using annuities to generate income and manage market risk can allow clients to continue investing a portion of their portfolio more aggressively, for greater growth potential.

According to our advisory authority study, 84% of advisors and financial professionals said the use of an annuity with an income guarantee is important for supporting a sustainable withdrawal rate. Recent analysis from Goldman Sachs Asset Management also suggests that allocations to annuities with a guaranteed lifetime withdrawal benefit (GLWB) can create more income with less risk than systematic withdrawals alone.

In addition, an innovative category of annuities, known as in-plan guarantees, is being developed for use in qualified retirement savings plans, such as 401(k)s, 403(b)s and 457(b)s. As qualified plans are becoming a primary vehicle for retirement savings, in-plan guarantees provide a solution for converting those savings into retirement income, protecting principal — or both. Thanks to the Secure Act, our industry is expanding the category, and it’s easier for more employers to offer in-plan guarantees in the workplace.

Adoption of annuities is growing, especially among younger investors. According to the advisory authority study, roughly three fourths of Millennial investors and roughly two-thirds of Gen X investors said they would be likely to choose an annuity to protect against market risk, and similar numbers said they would feel more secure if a portion of their portfolio was invested in an annuity to help protect against outliving their retirement savings.

Power of Tax Deferral

When saving for retirement, taxes can be one of the biggest investing expenses a client can face — and the impact can diminish their portfolio’s performance. According to Nationwide’s retirement income survey, only 58% of adults surveyed knew how to use tax planning to get the desired outcome they want from the IRS during tax season.

A tax diversification strategy, across a range of different tax-deferred, tax-free and taxable vehicles, gives clients more control over how much they pay in taxes and when those taxes are paid. Tax diversification can also give your clients flexibility should tax laws change.

Tax deferral not only helps clients minimize their tax bill now, it also allows them to accumulate more year over year for their retirement. Starting early, automatically contributing to tax-deferred qualified plans at work and maxing out contributions to make the most of any employer match are key.

Using tax deferral as part of an asset location strategy is also important to help minimize the impact of taxes and potentially increase returns without increasing risk. You can locate tax-efficient assets, taxed at lower long-term capital gains rates, in taxable accounts. Locate assets that are less tax-efficient, taxed at higher ordinary income and short-term capital gains rate, in tax-deferred or tax-free vehicles.

Start with qualified plans, then IRAs and Roth IRAs. Once these are maxed-out, low-cost investment only variable annuities (IOVAs) can be a solution for even more tax-deferred accumulation. The tax savings can be substantial, especially for those in a higher tax bracket.

Clients may not be able to eliminate the unknows of retirement planning. But you can help them be better prepared with the “retirement planning trifecta” of protection, guaranteed income and the power of tax deferral.

(Image: Nomad_Soul/Shutterstock)


Eric Henderson (Photo: Nationwide) Eric Henderson is president of Nationwide Annuity.