Build a Retirement Income Fortress for Your Clients

By Daniel Herr
InsuranceNewsNet Magazine, January 2012

It seems like every day a new headline adds to the pain that many clients are experiencing in retirement, especially those who are planning to retire.

These articles trumpet the stock market’s stomach-churning volatility, stubbornly low interest rates, lengthening life expectancies and possible raging inflation because of the government debt and other reasons. No wonder there is a lot of wincing going on out there.

People are unsure they even have a hope of being able to maintain the lifestyle they are accustomed to living. Even as far back as April 2010, the “EBRI Employee Retirement Confidence Survey” showed that only 20 percent of Americans report that they are “very confident” they will have enough money in retirement to last their lifetime. That number has probably dropped even further since then.

Here is a short guide for understanding the pain clients are enduring and how a guaranteed income, such as annuities, can help them: 

Market Volatility—No one can predict what the market will do or when it will do it. The market has experienced annual returns, ranging from increases of more than 50 percent to declines of 40 percent or more. Your clients’ income in retirement must be predictable and sustainable to remove the angst of having to drastically alter their lifestyle when markets are down.

Making sure you’ve guaranteed that your clients will sustain a minimum level of lifetime income in retirement is critically important. Guaranteed income solutions will enable your clients to convert their accumulated retirement dollars into guaranteed lifetime income dollars, even long before they are ready to retire.

Inflation—Core expenses that cost $50,000 today will likely cost two or more times that in 20 to 25 years. People will need to work hard to maintain their purchasing power. The average annual inflation rate since 1980 is nearly 3.5 percent. If that continues, the costs for goods and services will double in 20 years, according to a June 2011 report from the U.S. Bureau of Labor Statistics.

It’s important to plan for their income to keep up with inflation or buying power could erode over time. Guaranteed income solutions on variable annuities have the potential for growth. Clients are able to sustain and even have the potential to grow their guaranteed income, before and well into retirement. Your clients’ minimum level of income in retirement needs to be able to increase and lock-in growth in order to combat inflation.

Longevity—A retirement can last 20 to 30 years or more. One member of a 65-year-old couple today has a 50 percent chance of living to age 92 and a 25 percent chance of living to age 97, according to the Society of Actuaries 2000 Annuity Tables. Your clients’ income needs to be guaranteed to last as long as they do. Their worst fear is being in good health but having to drastically change their lifestyle to reduce their income needs in order to make their retirement nest egg last. Variable annuities with guaranteed income features can turn a portion of their assets into an income stream that is guaranteed to last the rest of their lives.

Health Care—Everyone needs it, and it can be expensive—the costs are rising faster than inflation. Based on the findings in the January 2010, “LifePlans, Long-Term Care Market Summary,” conducted by Lincoln Financial Group, approximately 70 percent of Americans age 65 or older will need some type of long-term care in their lifetime. People need to consider the unexpected and protect their assets from being decimated by a critical healthcare event or the need for long-term assistance with activities of daily living.

Changes in the tax law with the Pension Protection Act of 2006 now allow long-term care benefits to be made available within annuities, enabling your clients to protect their income against a future long-term care need with an annuity with long-term care coverage.

Taxes—It can take a big bite out of their income. The top marginal tax bracket is currently 35 percent. And that’s only likely to go higher in the future—so minimizing their tax burden can help stretch their savings. For non-qualified accounts, there are variable annuities with guaranteed income solutions that qualify for the annuity tax-exclusion treatment, affording individuals additional tax advantages while keeping the control, access and flexibility that historically had been forfeited for such benefits.

Annuities with guaranteed income features have been helping individuals find security in protecting their lifestyle in retirement for more than a decade.

When these various innovations first came to market, they filled a need to help clients accumulate, protect and provide for guaranteed retirement income. Over the years, these offerings have evolved to solutions that allow for control and access to assets while providing a lifetime income with protection from inflation and longevity, nursing home benefits, flexibility and tax-efficiencies.

Providers are offering guaranteed income solutions that don’t require your clients to give up total asset control. These solutions offer equity exposure to provide growth potential, while providing an effective hedge against inflation (although it should be noted that providers may have restrictions on the percent of equity exposure allowed with guaranteed income solutions). Clients retain control and access to assets—even after income is drawn—while mitigating longevity risk through a guaranteed lifetime income stream. Additionally, more customized income features provide minimum income guarantees, but also provide for better upside potential for the income. This benefit can be even more important as today’s retirement accounts may be lower due to the fluctuating market.

Keep in mind, there are costs associated with these features, but the value is there for those who need this type of protection.

Five Basic Steps

The market is now so cluttered with information about guaranteed income features in variable annuities that it can be overwhelming and confusing for clients. Take the time with them to understand five basic steps:

• Learn about the core value that these solutions can bring.
• Understand the basics of how all of the features work so clients can get the most out of these solutions as they continue to evolve.
• Weigh the costs associated with these guarantees against the benefits they offer.
• Understand which of your clients can benefit the most from a guaranteed income solution that can help maintain their lifestyle through retirement.
• Recognize that a valuable benefit of a variable annuity lies in the strength of its investment line-up and the potential for their assets and income to grow.

Other Considerations

When talking with your clients about guaranteed income solutions, go over some additional considerations they need to be aware of:

• Discuss the importance of finding an insurance company with a history of financial strength.
• Have clients read the product prospectus before investing in any variable annuity with a guaranteed income rider.
• Make sure they understand the expenses, commissions, applicable fees and surrender charges.

Daniel Herr is vice president, product research & development, retirement solutions, Lincoln Financial Group. He can be reached at [email protected].

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