In order to deliver an effective and attractive retirement income solution, financial advisors must emphasize Social Security and propose strategies that integrate government benefits with income generated from other investment products, according to a report by Cerull Associates.

The report, "Cerulli Edge—U.S. Retirement Edition," said that while Social Security is a vital source of income in retirement, investors are too quick to discount it. Only 18% of active 401K) participants anticipate that Social Security will represent their primary source of retirement income, yet Social Security comprises the largest portion of income for retired households with less than $2 million in investable assets--more than defined benefit and contribution distributions combined, Cerulli said.

The report attributed the attitude to concerns surrounding the depletion of Social Security trust fund reserves. It pointed to a 2019 report issued by the Social Security Administration projects that, assuming no further changes to the tax code, the agency can continue to pay out full benefits through 2035, at which point tax revenues could only fund about 75% of scheduled benefits. 

The report further noted the benefits of delaying claiming Social Security. That is, payments increase by 8% up to age 70 compared to taking them earlier. The most popular age to commence Social Security is still at age 62, the earliest possible, but a growing subset of the population is opting to delay payment. In 2018, close to 12% of new claimants were older than the full retirement age, compared with only 5% in 2008, the report said.

While the report found that nearly half of participants expect to draw on their 401(k) as a primary source of income in retirement, it also indicated more than 40% of 401(k) plan participants lack an official source of retirement advice. And for those ages 50 to 69, that percentage rose to 88%. Those age 30 and under also scored high (51%) in not having a financial advisor. This “advice gap” is more prominent for investors in lower wealth tiers, the report noted.

As for health care, the report found that plan participants over 50 cite it as a primary source of financial stress.

And while investors have shown interest in annuities, the report pointed out that insurers have not positioned their product offerings for employer-sponsored retirement plans, though more than 70% indicate they may offer in-plan annuities in the future.

Annuities, the report said, stand out as a product that can fulfill the need for guaranteed income in retirement, representing an opportunity for insurers. It also noted that the passage of the Setting Every Community Up for Retirement Enhancement (SECURE) Act represents another opportunity for annuity providers to serve the need for guaranteed income in the $5 trillion 401(k) market.

There is also a growing awareness of the need for affordable, high-tech retirement planning services to help manage multiple streams of retirement income in a tax-efficient manner, Cerulli said.

“Providers and advisors who focus on the fundamental financial questions facing retirees—How much is enough? Will I take a tax hit for this? What are my healthcare options?—and offer the technology to solve these issues are well positioned to establish long-lasting client relationships,” said Anastasia Krymkowski, associate director at Cerulli Associates.

 

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