08.23.18
Managing 4 Key Retirement Income Risks
by: Stuart Bergoine, CLU®, ChFC®, Vice President Relationship Management, Eagle Life Insurance Company
This content was developed by Eagle Life Insurance Group for the BISA audience.
Half of older Americans have no retirement savings, according to the U.S. Government Accountability Office. That figure is especially troubling considering more than 10,000 baby boomers reach retirement age every day and will continue to do so for the next 15 years.
Moreover, this generation is heading into retirement with fewer pensions than previous generations. The Government Accountability report also noted, as of 2012, the number of workers relying on employer-sponsored retirement plans with pensions and lifetime income benefits has been reduced to less than 41 million. More than double that — 91 million employees — now have retirement savings plans, such as 401(k)s, which offer no guarantee of lifetime income.
Safe-Money Solutions
With more and more Americans eyeing their retirement strategy, many are seeing safe-money solutions, like Fixed Index Annuities (FIAs) as the right product for the right time.
LIMRA Secure Retirement Institute forecasts that sales of fixed annuities will increase across all product lines: indexed, fixed-rate deferred and income annuities. The Institute expects their sales to increase 5–10 percent in 2018, on pace for the record levels of 2016 when sales topped $60 billion.
Problem Solvers
As financial professionals, we are tasked with helping a growing population find the retirement solution best suited for their lifestyle. In short, we are problem solvers. Helping clients prioritize concerns and problems is a key step in developing a strategy and product mix that achieves their goals.
Clients can often be pre-occupied with reaching a particular dollar amount, so they lose sight of the day-to-day demands and realities of retirement income. No one will deny the importance of responsible saving and securing a sound retirement base. However, it is equally important to understand the importance of developing a stable income source that is protected from the inherit risks in long-term planning. The more we help clients understand these risks, the better we can understand where safe-money products fit into a comprehensive retirement plan.
Income Risk Factors and FIA Benefits
For context, let's consider four major risks to retirement income and what FIA benefits can do to help manage those concerns.
- Longevity
Risk: Americans are living longer, healthier lives, and retirees are faced with the real possibility of outliving their money. Many in their mid-60s today can expect 25–30 or more years of retirement. According to the Social Security administration, about one out of every four 65-year-olds today will live past 90.
FIA Benefit: The product's design helps establish an income source that produces guaranteed income while offering liquidity options, and the opportunity to benefit from index increases. For clients wanting to lock in a lifetime income stream can elect to add an income rider that provides additional flexibility for lifelong income payments.
- Volatility
Risk: In the wake of the great recession, many Americans have serious reservations about the toll stock volatility can take on their portfolio. With good reason, the nation's 401(k)s and IRAs lost about $2.4 trillion in the final two quarters of 2008.
FIA Benefit: As insurance product, the FIA is not directly tied to any index. That means, there are none of the exposure risks associated with direct stock or share ownership. The annuity cannot lose money due to volatility and the interested credited will never be less than zero.
- Health
Risk: Health can be one of the biggest expenses and uncertainties retirees face. More than half (52 percent) of people turning 65 will have long-term care needs.
FIA Benefit: Contract values can be tapped into and income increased for care-related expenses. While these products are not long-term care insurance, their liquidity features and enhanced payment benefit rider options can go a long way in securing income when clients need it most.
- Sequence of Returns
Risk: When contributions stop and clients start withdrawing retirement money to pay living expenses, their revenue pool can be particularly vulnerable to economic downturns. Negative, or even lower, returns in the early period of retirement income withdrawals that rely on underlying investments can rapidly deplete a portfolio. As result of these early lulls, savings can decline faster and the losses are baked in.
FIA Protection: The FIA is designed to protect income, so there is no risk due to index decreases. Therefore, the annuity contract value is safe from the sequence of returns eroding its value. By implementing an in-plan guaranteed income solution, FIAs can help clients manage the unpredictable and sustain lasting retirement income.