Earlier this month, Limra announced new research that forecasts investable retirement assets will rise to $22 trillion by 2020 for U.S. households with a person over age 55. This presents a tremendous opportunity for advisors to help their clients prepare for a financially secure retirement. Most individuals now realize that they cannot rely on Social Security or an employment-based pension plan to fund their golden years. At the same time, they may be overwhelmed by the prospect of funding their lifestyle for 25 years or more after they leave the workforce. As an advisor, you need to address two of your clients’ biggest retirement concerns: outliving their money and protecting their savings between now and when they plan to retire.
A good way to view retirement funding with clients is to break their retirement down into three stages. You will have to take into account that their needs – and the expense of covering them – can very well change over the course of retirement.
During the first stage, retirees retain the personal independence they enjoyed before retiring from the workforce. Typically, their financial needs are somewhat more modest than in later stages. By stage two, things often begin to change. Many clients should be ready for the possibility that their ability to live independently may decline. They may require more help around the house. Medical costs, at the same time, may rise. As a result, they will need to budget for additional expenses – the cost of a part-time home attendant, or transportation to and from an activity. Finally, in the third stage, many retirees can expect another jump in expenditures as they come to rely more and more on outside help and supplemental services.
Advisors are better positioned than ever before to introduce investors to more sophisticated ways of retirement planning to prepare for the three stages of retirement and to reduce the chance that they will outlive their money. An effective strategy to prepare for the varying financial needs of each stage is to incorporate annuities into their retirement savings plans using a laddering concept.
Laddering involves the bundling of staged investments that can be compared to the way many advisors work with bonds or CDs. With fixed-income holdings, laddering helps investors diversify their portfolios and potentially take advantage of rising interest rates. Similar thinking applies to annuities: buying variable or fixed products that produce income in stages makes it possible for your clients to create a tailored rising income stream. This laddering strategy offers clients the ability to set up and later trigger two or more sources for generating steady, reliable lifetime income at different stages during retirement.
Once you factor how life expectancy rates seem to be extending your clients’ plans out further and further, you’ll immediately see why this makes a lot of sense. Longevity actually multiplies the risks, including market risk, inflation risk and health risk, retirees encounter in their efforts to stretch their savings to last for their lifetime.
While an annuity or a multiple set of annuities might not be appropriate for all clients today, insurance companies provide annuity products that make it possible to accommodate most investors’ retirement needs, goals, and timetables. Laddering income makes it possible for clients to prepare for each of these retirement ‘tiers’ and gain a greater peace of mind in the process.
Clients are looking to their advisors to help them build their retirement portfolios and assess what’s right for them. As one part of a comprehensive retirement plan, laddering annuities can provide guaranteed income for covering your clients’ financial needs, which will change over the course of their retirement. Your clients may have a greater sense of security in knowing that they’ve made provisions for a stream of income they can’t outlive. And while it may not be apparent at first glance, that same purchase can free up discretionary funds that you, their financial professional, can help your clients use to achieve their investment goals.
Douglas Dubitsky is vice president of product management & development for retirement solutions at The Guardian Life Insurance Company of America. He is responsible for directing Guardian’s retirement product and service offerings.