By the time you go to bed this evening, some 10,000 baby boomers will have turned 65 today. Many of them will have already vanished from the workforce. And many more will soon pull the same disappearing act.
How prepared for the financial pressures of post-work life — a period that may extend decades — are these retirees? How prepared are you?
The nearer to retirement our nation’s baby boom generation grows, the clearer the reality becomes. Boomers must confront a worry they knew was coming but for which they may not have adequately planned: disappearing income. As employer paychecks fade from view, a gap between income and expenses often emerges. And the shortfall makes for a scary sight.
Relying solely on Social Security and traditional pensions seems increasingly tricky. As recent retirees can attest, Social Security cost-of-living adjustments have faded in recent years. Questions regarding the program’s long-term viability persist. In addition, the availability of traditional employer-sponsored defined-benefit pension plans continues to shrink. As a result, the payout from these sources may fail to completely cover a retiree’s primary expenses. For the balance, there may be no choice but to tap personal assets.
If retirement lasted only a few years, such a drawdown might suffice. But the reality is people now live much longer. The result? Decades of post-employment exposure to such wealth-depleting forces as market volatility, higher health care costs and increased inflation. Those forces drain retiree resources. And they can raise the odds that retirement income will lag farther and farther behind retirement spending.
This poses a challenge for clients but presents an opportunity for financial professionals. Retirees, more than ever, seek assurance that their reduced income stream during retirement will satisfy their spending needs. So when the income level enjoyed during their working years wanes, how do you help conjure solutions that can make some of it reappear in retirement?
Finding the invisible income
It is possible for income that seemingly isn’t there to emerge into view. Start the process by taking a comprehensive look at your client’s monthly cash flow. Focus on the outlays your client considers primary. Then add up their current guaranteed income stream (i.e., government benefits, employer pensions, etc.). Next, compare the two totals to discover if a shortfall exists. And finally, consider financial products with the potential to enhance and possibly even guarantee the income outcome.
Consider an example. Say a retired couple comes to you for help. Al, 65, and Ann, 62, tell you, “The income we had before retirement just isn’t there anymore. We need more to meet our needs.”
Doing a little fact finding, you define their dilemma. You see they have $400,000 in invested assets. And their cash flow shows essential expenses of $3,500 but guaranteed income of only $3,000. So their monthly shortfall is $500.
Al says they plan to draw down assets from other investments to pay for primary expenses. But Ann worries doing so may erode their nest egg at an unreasonable rate. Addressing this gap doesn’t mean they must cut out the costs that create their preferred standard of living. The money they need is likely still there, but to Al and Ann it may be invisible.
One way to make it appear is through the benefits of an income annuity. It’s a product that can bridge the gap in primary spending by creating guaranteed income immediately and long into the future.
See also: Infographic: 2012 annuity review: Indexed hot, variable not
For example, to generate the $500 Al and Ann need from a joint and survivor life immediate annuity with a 10-year period certain may require a premium of approximately $92,000. For that sum, they could receive a monthly check they can count on for the rest of their lives yet, at the same time, preserve 77 percent of their portfolio to pursue continued growth opportunities.
So Al and Ann can use the income annuity to make the money they need to cover their shortfall appear on a consistent, guaranteed and monthly basis. In fact, they can assure themselves of the fact that it will never disappear for as long as they live. Plus the income annuity makes some of their other concerns vanish as well. It can remove unwanted volatility from their portfolio. And some income annuities offer increasing payout options that can help address inflation. Also, because the income generated by the annuity helps cover monthly costs, they can reduce their withdrawals from other assets. The result may be a more conservative, more sustainable withdrawal rate.
In summary, the process of making invisible income appear with an income annuity includes:
- Quantifying the monthly retirement income shortfall.
- Determining how much money a client can allocate to an income annuity.
- Meeting primary expenses with the help of annuity payouts.
- Assuring clients that the annuity income will never disappear.
- Explaining how an annuity can reduce certain financial risks and free up other investment assets.
One final caution: as with any financial product with guarantees, consider the guarantor. Make certain the issuer is highly rated for financial strength and stability. Income annuity buyers want strong income features and a strong company behind them.
The opportunity revealed
Now you see them, now you see more of them. Just in the time it took you to read this article, consider how many more baby boomers have just retired. And thousands more will appear today, tomorrow, and going forward. Faced with longer life expectancies and growing financial uncertainty, finding the invisible income in your retiring clients’ portfolios will become increasingly important. It’s your job to help them reveal the retirement income stream they may not realize they can create with the right financial product.
Important — please read: An immediate annuity is permanent. An owner has no access to the premium, which converts to income payouts. A contract has no cash value, no death benefit and cannot be surrendered. Terms such as the payout amounts, timing and rates cannot be changed. Payouts end at the annuitant’s death unless a certain period or installment refund option is elected. Life contingent payout may be less or more than the premium based on the length of the annuitant’s life. Life and temporary life payouts provide no benefit on or after the death of the annuitant.