More than eight in 10 retirees with at least $50,000 in savings are receiving lifetime income from traditional pension plans and annuities, but future generations are less likely to have pension income at their disposal, according to a Insured Retirement Institute (IRI) survey.

“Baby boomers that are working with advisors now who are planning their retirement are predominantly going to be looking at their invested assets with their retirement savings being the vehicle to provide them with income in retirement,” said Frank O’Connor, vice president of Research for the IRI.

Some 21 percent of retirees 65 to 69 years old receive annuity payments compared with 35 percent aged 70 to 74 and 40 percent for those 75 to 80 years old, indicating that annuity purchases may be occurring later in life to maximize income.

The challenge for financial advisors will be turning any available retirement savings into income in an optimal way.

“It's an exercise in determining how much of those savings should realistically be put into something like an annuity to secure guaranteed lifetime income versus how much work needs to be done on the other side of the balance sheet to potentially reduce expenses,” O’Connor told Financial Advisor. “You'd want to think about having an emergency fund for liquidity and so that you can react to unexpected expenses.”

That’s because the majority of retirees are still in denial about their risk for incapacitation. According to the study, some 67 percent believe they have less than a 25 percent chance of requiring long-term care services in retirement while the Department of Health and Human Services estimates that 70 percent of those turning 65 today will need such services.

“A very concerning result of this study was the extent to which people really don't understand the risk they face in terms of health care, and especially long-term care, and what a long-term care event could potentially cost them and how it would be paid for if it does occur,” said O’Connor.  Six in 10 retirees incorrectly believe that Medicare will pay for long-term care services, according to the study.

The study further disclosed that future retirees may need upwards of $400,000 to make up for a shortfall in pension income.

For boomer clients who don't have a pension among their streams of retirement income, Kerri L. Kimball, a CFP in New York, recommends investing a portion of savings in a fixed immediate annuity. “No bells and whistles that would cost money and erode the payout,” Kimball told Financial Advisor magazine. “I advise just one annuity, if possible, because retirees end up with so many different income sources that it can be confusing.”

The survey of people five to 15 years into retirement further disclosed that 29 percent of current retirees are receiving annuity payments with 67 percent receiving income on a lifetime basis versus a fixed period.

Fixed income annuities include single premium immediate annuities (SPIAs), deferred income annuities (DIAs) including qualified longevity annuity contracts (QLACs), and fixed index annuities (FIAs) with income riders. Lifetime income can also be generated from variable annuities with living benefit riders.  
“The amount of money needed to provide lifetime income in an annuity for someone who hasn't saved at all would be the maximum amount they can afford to place in the annuity,” said Jason Murray, a financial advisor with World Financial Group in Hackensack, N.J. “The variable annuity would be the one I would select due to the growth potential before the client begins to take income.”

Largely 72 percent of retirees receiving income from an annuity were satisfied with their investment, which was higher than any other type of investment or retirement savings vehicle. “The annuity is giving them a paycheck,” O’Connor said. “Mutual funds, stocks and bonds have volatility attached to them, which potentially lowers the feeling of satisfaction of owning these types of investments. With the annuity, it's directly impacting in a positive way their retirement experience.”

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