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Written by: Paul R. Samuelson | LifeYield
I drive a Chevy Volt, frequent public transportation, and bike to work when the weather allows.
I’m conservative in my spending and investing and relatively immune to fads. I won’t be baited into paying extra fees for goods or services when I don’t think they’re worth the cost.
So, readers may find it surprising that I agree with ardent annuity advocates that guaranteed income products hold a rightful place in many clients’ retirement plans. The marketplace seems to agree: Witness the boom in annuity sales over the past two years.
Retirement Income Planning Is Not for DIYers
According to the Center for Retirement Research at Boston College, nearly half of U.S. households won’t be able to sustain their living standards in retirement. While low-income households were at the highest risk, so were 41% of high-income households.
Those numbers send a message: retirement is no place for do-it-yourselfers. As I’ve long written, financial advisors should warn clients to:
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Work as long as they can (for many, past 65) to accumulate retirement savings and benefit from employers’ matching contributions and
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Delay Social Security filing to age 70 to optimize monthly, annual, and lifetime benefits.
Alarmingly few people make those choices. Some don’t have financial advisors who will give it to them straight. Others assume they can do it themselves, applying the 4% rule using their smartphone calculators.
Excuse my bluntness, but a vanishing number of seasoned investors is up to that job, and even that elite minority risks disaster if (and usually when) age and disease impair their capacity to make financial decisions.
No, only sophisticated software makes it possible to do ongoing, complex calculations that can help light a way to lifetime financial security.
Start Somewhere Safe with Social Security
Not every prospect or client is ready to dive into the deep end with longevity calculators and lifetime income needs, but Social Security is a convenient gateway to understanding retirement income.
Who doesn’t wonder, “What can I expect from Social Security?” Ask your clients if they’d like to know. Then, using Social Security software, you can then compare expected benefits conditioned on work records and anticipated longevity for both members of a couple.
(Remember to counsel clients who want to “short” their longevity that, contrary to intuition, many medical conditions don’t lower their life expectancy. They only reduce the span of years someone enjoys relative health.)
Progressing from Social Security estimates to retirement income software can help you project levels of inflation-adjusted income clients will need to cover living expenses and how they’ll draw that income from various sources, including:
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Full- or part-time work
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Pensions
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Savings and investments, including required minimum withdrawals (RMDs)
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Life insurance
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Inheritances
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Annuities
A technology-enabled analysis can reveal income gaps or shortfalls based on when clients plan to retire and when they plan to file for Social Security benefits — not necessarily the same age. The analysis can also uncover potential needs for an income boost late in life.
Bridging Income Gaps with Annuities
A Social Security-plus-retirement income analysis often sets unmarried clients on the course toward a single payment income annuity, typically with a cost-of-living (COLA) adjustment.
A married household with modest savings needs to face the reality that a widowed member will receive only the higher Social Security payment (a fact that takes many clients by surprise). Retirement income software can project constant expected income levels achieved by:
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Spouses retiring at different ages.
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Filling income gaps with withdrawals from retirement accounts.
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Maintaining a reserve for the stepdown in the widowed spouse’s Social Security payments.
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Buying a single payment immediate annuity (SPIA).
SPIAs have two advantages: simple terms and low fees. Clients will need your help selecting COLA and survivor benefits. A spouse with compromised health will need to purchase an annuity with a certain period of payments.
Mass affluent households with $500,000 to $2 million in investment accounts may benefit from some combination of single-payment immediate annuities (SPIAs) and registered index-linked annuities (RILAs).
SPIAs can be purchased from a traditional IRA, with the premiums and value of the annuity purchase primarily determined by the size of the IRA.
RILAs have two advantages: greater flexibility in the timing of purchases and pattern of payouts, including payouts that depend on a combination of market indices.
RILAs also have two disadvantages: higher fees and higher taxes because they are funded by withdrawals from a brokerage account, and income and appreciation are taxed at ordinary rates.
High-net-worth households have more assets to use to create retirement income, but even they may benefit from one or more types of annuities:
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An investment-only variable annuity (IOVA) allows owners to defer taxes on highly taxed securities, especially alternative investments.
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A single-payment deferred annuity (SPDA), often called longevity insurance, can be purchased for each spouse in their traditional IRAs.
Payments on the latter could begin in late old age (80 to 85) to provide living expenses when someone cannot fully participate in their financial affairs.
The situations I’ve described explain in part the rise of platforms investment-focused, fee-based advisors can use to gain access to low-cost, no-commission annuities. The insurance industry, recognizing the opportunity in the retirement income crisis, has become more creative in its product development and support of traditional insurance producers.
Across the board, financial professionals are more keenly aware that they can gather more assets and inspire referrals when clients feel they have a plan and can exhale at the thought of retirement.
In some cases, that means turning to annuities.
Paul R. Samuelson is the chief investment officer and co-founder of LifeYield.