Overcoming The Retirement Challenge

September 30, 2011

First, let’s look at the economy. Since the beginning of the recession, many people have lost a significant portion of their retirement nest egg as a result of the ongoing economic downturn, and some may even have to delay their retirement. Most can't afford any more losses due to market-related risks. Accordingly, they are choosing not to take those risks.  Many people have opted for secure, safe money places, such as CDs and money markets. These products remain at very low interest rates.

Most retirement tools and services emphasize investments and accumulation strategies.  However, many advisors in the financial services industry don’t seem understand that it is now an income game.  Americans need to be focusing on “decumulation.”  There's very little offered in the way of tools and services geared to formulating what I would call a spend-down portfolio. 

For example, “how are we going to structure a program through which we're going to make sure your clients’ income lasts forever?”  And also, many are concerned with annuitization in which they think that too much control has to be surrendered when they convert those assets into SPIAs.  We have great opportunities in the market if we only take advantage of them.  Laddering – providing income sources and separating essential from discretionary income – is the beginning.  Well, how do we do this?  Let's take a look.

We can actually guarantee retirement income.  I always get a smile on my face when I read that the old method was to take 4 percent out and you have a 90 percent chance of not running out of money!  Now it's take 3 percent or maybe take 2 percent.  Remember just a couple years ago when people were saying, “Don't take anything out!”  Well, I don't like this concept of a 90 percent chance of not running out of money. Why don't we help our clients by guaranteeing them a 100 percent chance that they won't run out of money?

Most of you are aware of the tremendous benefits that fixed indexed annuities have provided for the market place.  These products are another safe money haven where their main job has always been, and will continue to be, to provide a higher rate of return and a higher interest level than you would receive with traditional annuities, MYGAs, CDs, and other safe money places.  But in the past few years, these products have really emerged with fantastic new features, including all of the guaranteed lifetime withdrawal benefits and the death benefit riders.  Most of the indexed annuities today provide these features.  So, if you truly ladder products, you have a lot of options for your clients you can use to make sure you are providing them with a secure, reliable retirement income.  Here are some choices. 

One of the options – you can combine the SPIA and deferred annuities.  But people are saying, “The rates might be too low, and some of your clients may be unwilling to surrender control by annuitizing their retirement assets.”   Maybe you should go with a SPIA for the first five years just to get them out of the woods to supplement their Social Security and other defined benefit programs.  Here's a second option. 

You can take a single product approach – give your client an indexed annuity, one that has the income rider.  This approach will solve the problem, as opposed to doing the combo with the SPIA, but it doesn't provide any cost of living adjustments, so it's not going to take care of all their challenges.  Here's a third concept that is also a single product approach.  Use an indexed annuity with an increasing payout.  That's good, but will that be enough?  I know it's going to be linked to future performance of that account, but I don't think we're going to solve the problem entirely.

There is what I am going to call the “100% Solution.”  With this approach, we will be structuring many different indexed annuities using different payout options.  Use a laddering program that will allow you to show which indexed annuity will have the best payout schedule for various time periods.  Maybe we're assuming we're going to use a SPIA for the first five and then let the other monies just stay there to grow for a specified period of time.  And then we look and say. “Okay, I'm going to need more money in ten years.  Which annuity is going to give me the best income account growth and the best payout at that point?”  This way you are really customizing the program using a variety of products. 

And what I like to do, (the icing on the cake) is add a fifth part to this laddering program. I want to make sure that we take care of the lost Social Security check.  That’s right – the lost Social Security check.  I have never seen a group of people that has become so interested in how Social Security works.  The questions are, “When do we take it?” “How do we get the maximum?” “What do I lose if I take Social Security early?”  However, here’s one thing that people seem to forget or don't want to face: the fact that you lose one Social Security check when one spouse dies.  The fifth rung on the ladder is for you to put a life insurance policy in that will replace that lost Social Security check!  It’s perfect!