Legacy— their “wishes,” such as trust funds for grandkids, helping to pay for college, charitable giving or their desire to create a financial legacy to last for generations.
Step 2—Identify Income Sources: There are two main categories of income:
Asset-based—including nonqualified (after tax) assets, traditional/Roth IRAs and defined contribution plans (401(k), 403(b), etc.
Income-based—including continued employment, annuities, pension (defined benefit) plans and Social Security
It’s important that your clients understand that essential expenses should be covered first using dependable/reliable, guaranteed income. After all, those are the expenses that they must cover regardless of market conditions or other influences. A second consideration is that these expenses will increase over time. Investing in guaranteed income that has the potential to increase—not just in the first year but throughout retirement—can be critical for success.
Step 3—Determine Social Security Strategy: Although there are several sources of income in retirement, the main source of retirement income for most is Social Security. It is often known as the foundation of retirement income sources because the majority of retired Americans rely on Social Security benefits for at least a portion of their retirement income. It provides a dependable source of income that Americans will rely upon and, in most years, includes a cost of living adjustment.
However, in general, studies indicate that Social Security alone cannot provide sufficient retirement income. It was designed to be a supplement to retirement income not the main source of income. Therefore, it is important that your clients know the options available for filing for Social Security benefits in order to enhance their benefit as much as possible.
Three are many considerations when filing for Social Security, including: when to start taking benefits, based on health, longevity projections, and marital status; how new rules and regulations have affected benefits; and how survivor or divorced spousal benefits work in specific situations. Becoming familiar with a Social Security calculator, whether the one provided by SSA or a proprietary one, that can illustrate different options will allow you and your client to make an informed decision on what strategy may best suit their estimated needs.
Step 4—Identify Income Gaps: Once your client has evaluated (and hopefully enhanced) their Social Security benefit, the next step in the VIP process is to identify potential income gaps. This is most effectively done by having them complete an expense worksheet, separate the expenses into the categories mentioned above and then align the essential expenses with identified guaranteed income. Subtract essential expenses from current or expected guaranteed income (Social Security, pensions, annuities, etc.). The difference remaining is either a surplus (that’s great and highly unusual) or, more likely, an income gap. You can use any worksheet and/or your own financial planning software to uncover any potential income gaps your clients may be facing.
Through this process, you will be able to help clients identify any retirement income shortfalls or gaps. But be sure to check with your own compliance department regarding which forms or tools have been approved for use.