Hurry, read fast! By the time you finish this article, another 27 baby boomers will have turned 60. And by this time tomorrow, nearly 8,000 more will have marked the six-decade milestone.
The perfect storm is on the horizon and approaching fast. This year, the oldest of the baby boomers -- the 78-million strong generation born between 1946 and 1964 -- reach age 60.
Are those swelling ranks of soon-to-be retirees ready for the financial demands of retirements that could extend decades? Are you?
Clients Will Look to You
Study after study has concluded that people in fact are woefully ill-prepared for retirement. So as the baby boom generation bears down on retirement, educating clients on strategies, risks, and corresponding countermeasures is a critical responsibility of financial professionals.
As many current retirees can attest, reliance solely on Social Security and traditional pensions is a mistake. Often, the total monthly payout from those sources fails to cover all of their primary expenses. For the balance of their income demands, they usually have no choice other than to tap their remaining assets.
Given a retirement period of only a few years, that might not be a problem. People, however, are living longer than ever before -- often meaning decades of post-employment exposure to such wealth-eroding forces as market volatility, high health care spending, and inflation. All are critical considerations. Outliving resources is a nearly universal fear among retirees. The reality is, doing exactly that might be easier than your clients realize.
This is a windfall opportunity because what your clients want, and need, is exactly what you have to offer. More than ever, clients are seeking confidence that their income stream during retirement will be sufficient to satisfy their spending needs. Guaranteeing clients' income will be a crucial part of the planning process.
The First Step: Face Reality
At Western & Southern Financial Group(R), we are focusing on the income planning process to meet the challenge that confronts the next generation of retirees. Education is the initial step in the process.
Growing audiences across the nation testify that financial professionals are getting on board. We are working with increasing numbers of them, helping them understand the array of risk factors their clients face. The key ones that imperil retirement security are captured in a mnemonic device we call "WHY LIE?"
W ithdrawal percentage -- Does the client know the rate at which his or her assets can be withdrawn while maintaining a high probability of not exhausting them?
H ealth care costs -- Is the client aware that health care costs historically have grown faster than general inflation? From 1993 to 2004, for example, overall health care spending doubled.
Y ield -- What level of investment return on retirement assets is the client assuming? Is that assumption compatible with the corresponding level of risk required?
L ongevity -- Is the client using a prudent assumption regarding the length of retirement? Life spans continue to increase, with the government projecting a total boomer population of 58 million in 2030.
I nflation -- Pay increases address this risk while a person is working. What about during retirement? Is the client factoring into his or her funding assumptions the diminishing value of a dollar?
E ntitlements -- What level of support is the client counting on from government and employers? Is it realistic amid widespread uncertainty over the future of Social Security and the increased scarcity of defined-benefit pensions?
"WHY LIE" serves two important functions. First, it sums up the risk factors that affect financial security in retirement. Second, it asks the client if he or she is being realistic in assessing those risk factors and the tradeoffs involved in addressing them as a whole.
After you help your client understand the risk factors associated with retirement, you've educated him to the need. You've laid the groundwork for discussing solutions and can move to consideration of some actual applications for an income annuity. A proven approach for doing so is one we term "Bridging the Income Gap."
Gauge the Gap ... Then Bridge It
The Bridging the Income Gap process begins with taking a snapshot of the client's monthly cash flow. In doing so, focus on those outlays your client considers primary. Then, tally his or her current guaranteed income stream (i.e., government benefits and, possibly, an employer pension). Comparing the two reveals the amount of primary expenses being covered by guaranteed income. Just as with "WHY LIE," it's necessary that your client face reality here.
For example, imagine yourself in a familiar scenario: A retired couple comes to you for help. The husband is 65, the wife 62, and together they have a combined $400,000 in invested assets. Working with them, you first develop a snapshot of their monthly cash flow that shows total expenses of $5,000 and guaranteed income that totals $3,000. To cover the monthly shortfall of $2,000 will require a 6% withdrawal rate from their portfolio in the first year ($24,000/$400,000).
What's most important is meeting primary expenses (housing, health care, food, taxes, etc.). You address needs before wants. Further discussion with the couple reveals that of their $5,000 in monthly spending, they characterize $3,500 as essential. Now you've reduced the monthly shortfall to $500.
Your client is drawing down accumulated assets to cover primary expenses. That's a concession most retirees fear -- and they should. By most estimates, even in more aggressive portfolios, consuming more than 4% annually (adjusted for inflation) might be eating into their nest egg at an unsustainable rate.
You're not telling them to cut out all the extras that define their quality of life. Rather, your aim is to put them in a position where their primary spending is covered by their guaranteed income. Here's where you show them the next step to retirement confidence: an income annuity.
For example, to generate $500 from a joint and survivor life annuity with 10-year period certain requires a premium of approximately $92,000. For that sum, your clients gain a monthly check they can count on for the rest of their lives and at the same time preserve 77% of their portfolio to pursue continued growth opportunities.
Not only are more of the client's expenses covered by guaranteed income, but the reallocation itself also can help sustain the remaining assets. Buying an income annuity helps remove volatility from the portfolio. In addition, because the income generated by the annuity will help cover monthly costs, clients can reduce their withdrawals from other assets. Again, this is key, as research now advises considering 4% as a safe, sustainable withdrawal percentage -- even in aggressively allocated portfolios.
In sum, the process of Bridging the Income Gap includes:
o Identifying and quantifying your client's monthly income shortfall.
o Helping determine how much money your client is comfortable allocating to an income annuity.
o Providing assurance that primary expenses will be met.
o Reducing volatility from the portfolio and helping to sustain it for longer durations.
o Freeing remaining assets for more aggressive investment strategies, offering potentially higher returns and some inflation protection.
The Solution Is Only as Strong as the Product
In a case such as the example discussed above, if the clients are relatively young and in good health, prudence calls for the use of a joint life expectancy of 30 years or more as a planning assumption. An income annuity represents a commitment that could extend for decades. That demands that the quality of the issuer be a major consideration -- specifically, its financial security as rated by independent industry analysts. High ratings bolster your client's confidence that the income flow can be relied on to last their lifetime, regardless of how many years it might stretch into the future.
Design flexibility is another key factor in selecting an income annuity. For example, does the product offer an increasing payout option to help protect the value of the income stream over time?
For the sake of your clients, you want complete confidence in the income annuity you recommend. That product should possess a profile for flexibility, benefits, and safety that promises to satisfy the needs of your customer for the remainder of his or her life, however long that might be.
Plan for Retirement Confidence
During the next decade, $1 trillion in assets a year will be unleashed by maturing defined-benefit and contribution plans and individual retirement account rollovers. The consolidation and distribution of those assets will help determine the retirement security of the baby boom generation. How they are handled will shape the long-term well-being of a massive generation destined to live longer than any before it -- one that stands on the threshold of retirement uncertain of its ability to manage its resources.
Reach out by asking your clients:
o Do you want to maintain your current standard of living in retirement?
o Are you confident in your ability to self-insure your longevity, or would you prefer to contractually shift that responsibility to an insurer?
o Are you looking for a plan that will help support you in your retirement by generating a steady income for as long as you live?
o Do you want to protect your savings from the effect of an unexpected downturn in the economy?
o Do your plans provide adequately for a surviving spouse?
Faced with increasing life expectancies and growing uncertainty over the many personal and financial concerns confronting future retirees, income planning becomes more important by the day for the gathering storm of baby boomers. You as a financial professional stand to benefit by helping clients "Bridge the Income Gap" with guarantees for retirement security that cannot be outlived.
Troy Miller is national director of income products for Western & Southern Financial Group(R), a diversified family of financial services companies with assets owned and under management in excess of $38 billion. Mr. Miller serves as a member of Western & Southern's Lifetime Income Solutions Group, researching, testing, and developing products, services, and tools for retirement income planning.
