The best vehicles for your clients' road to retirement

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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. 

FOR INCOME

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.”

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

“Some people don’t have enough assets to self-insure for a long-term care event,” says Porter-Medley. “Others may have enough, but they prefer to protect their assets to pass them on to their children or grandchildren rather than spend them down on a long-term care event.”

In either case, she says, some form of long-term care insurance makes sense. For younger seniors, particularly those in good health, a stand-alone long-term care insurance policy might still be affordable. Otherwise, the best fit may be a hybrid (or linked-benefit) life insurance product (such as cash-value universal life) packaged with an LTCI component. These increasingly popular LI+LTCI products not only tend to be more accessible from a medical underwriting perspective, they allow policyholders to use leveraged dollars to secure both life and LTC coverage.

If the policyholder ultimately doesn’t exercise the policy’s long-term care benefit, that money stays inside the policy to eventually pass to beneficiaries on a tax-favored basis. Some of these hybrid products also come with a return-of-premium feature, which appeals to many buyers, notes Porter-Medley. Single-premium annuities with an optional LTC feature also are available and worth considering in certain circumstances, she adds.

To match senior clients with the most suitable LTC coverage option, Porter-Medley recommends developinga written long-term care plan that identifies the medical, health and care expenses the client may incur going forward and the tools available to cover those expenses.

TO DIVERSIFY AND GROW ASSETS

Amid stronger correlations across certain asset classes that once were viewed as non-correlated (stocks and bonds, domestic and international stocks, for example), diversifying a portfolio enough to protect the investor while still providing sustained growth is increasingly challenging.

Investing in alternative asset classes is one way to meet the challenge. Today, alternatives come in a wide range of packages, many accessible to the mass affluent investor. For growth and diversification via more traditional vehicles, both Porter-Medley and Freiburger say they still often turn to mutual funds and ETFs, along with individual corporate securities. Each is a viable tool for gaining exposure to international asset classes, for example, Porter-Medley notes. Freiburger, meanwhile, says he’ll often use a mix of ETFs and mutual funds with senior clients to access the lower fee structures and passive management of ETFs in tandem with the active management of a mutual fund.

Diversification is also an important consideration with retirement accounts. For example, it may be wise for a person who is heavily vested in company stock inside a qualified retirement account to move at least some of that stock into another retirement account (such as a self-directed IRA), then perhaps to sell it and use the proceeds to fill another need. New tax rules governing the net unrealized appreciation (NUA) of company stock can make such a maneuver particularly tax-efficient, too, especially when it involves low-basis stock that has appreciated significantly.

TO ADDRESS INFLATION RISK

Because the prevailing low-inflation environment won’t last forever, it’s crucial to build inflation protection into a senior’s portfolio. The fact that the costs of health care, long-term care and medical treatment are increasing at rates that far outpace inflation only compounds that need.

Equities, and to a lesser extent real estate, are the two asset classes that Porter-Medley relies upon most to address inflation risk, given their historic correlation to inflationary trends. The old unwritten rule that says to reduce equity exposure as you age no longer applies in many situations, she says. Instead, it’s often a matter of maintaining a significant exposure to equities, but reallocating assets to more conservative investments within that class.

FOR TAX EFFICIENCY

As overlooked as it often is, “tax planning is especially important in retirement,” says Porter-Medley, because the money retirees are receiving from sources such as Social Security, pensions and IRAs are typically taxed as ordinary income.

From trusts designed to minimize tax exposure and maximize wealth transfer efficiency to maneuvers aimed at diversifying the tax profile of a client’s assets, advisors have a wealth of tax planning tools at their disposal. Qualified retirement accounts and the required minimum distributions from these accounts present advisors with unique tax challenges—and unique opportunities. A Roth IRA conversion is one maneuver worth considering, says Porter-Medley, for its ability to create a bucket of money that eventually comes out as tax-free income at some point during retirement. Essentially the client pays taxes on that money now, upon conversion, so they won’t have to pay them on distributions later, unlike with distributions from a traditional qualified IRA. 

Similarly, adds Freiburger, a person who has significant assets inside qualified retirement plans [such as a 401(k) or a self-directed IRA] might consider rolling money out of those plans into other vehicles that fill a need, such as to make up a life insurance shortfall or to create an income stream for now or sometime in the future, while minimizing the tax hit come RMD time.

Use these kinds of strategies to help seniors now, and keep them in your back pocket for when the baby boomers become seniors themselves.

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