The vital role advisors play in preparing their clients
by Kelly LaVigne, JDMr. LaVigne is vice president of Advanced Markets, Allianz Life Insurance Company of North America. Visit www.allianzlife.com
When thinking about retirement today, many Americans are focused on their accumulation strategy, and worrying about if they will have enough to retire. Certainly saving for retirement is no small feat. But once they have reached their accumulation goals, clients may not be thinking about what comes next. Working with them to create a formal retirement income strategy can go a long way in helping to reduce risks to their retirement savings, and boost their confidence as they head into this next phase of their lives.
However, a LIMRA Secure Retirement Institute study found that financial professionals have completed a formal retirement income strategy for only 35% of their retiree clients1. What’s more, just eight percent of Americans think creating a plan for how they will spend their savings in retirement could help reduce their retirement risk, according to a recent study by Allianz Life*.
So how can you help clients develop an income strategy to help them enjoy their golden years like they have always imagined?
First and foremost, it’s important to discuss some of the unknown risks that can have a negative impact on their hard-earned retirement savings:
- Longevity and the fact that people are generally living longer and thus spending more time in retirement than ever before.
- Inflation and how it will change the cost of groceries, rent and other monthly costs, which can affect purchasing power over a long retirement. Health care costs are only going to rise in the years ahead as well.
- Market volatility and the sequence of returns that can have a big impact on how long retirement savings can last.
Next, help clients understand what their expenses could look like five, 10 or 15 years into retirement. What they deem as essential and discretionary may change the longer they are in retirement, and health care expenses will almost certainly increase as they age.
Where the money comes from to cover those expenses should come from a combination of sources. A solid retirement income strategy includes generating income from accumulated assets, paired with these components: enhancing Social Security benefits, adding an annuity allocation, and complementing the strategy with life insurance:
- Social Security is the foundation for many American’s retirement income, but they may not understand how it works (now and in the future), and how to make appropriate decisions to get the most of their available benefits.
- Annuities play an important role in an overall financial strategy, as clients can’t know what sort of market challenges and longevity risks they may face as they head into and through retirement. A second source of guaranteed retirement income, like an annuity, can help alleviate some of those uncertainties and cover a portion of retirement expenses.
- Life insurance coverage through a fixed index universal life insurance policy can provide death benefits for retirees’ families. And while it’s not a source of guaranteed income in retirement, it can provide the opportunity to build accumulation value that can be accessed through policy loans and withdrawals2 to help fill in income gaps, or help cover unexpected expenses like health care costs.
Work with your clients to make sure they understand each of these and the role they can play in retirement. Then, work with them to understand their existing retirement income sources, how those can help cover retirement expenses as well as expose potential income gaps. Once a client understands that Social Security and their other retirement savings may not be enough to cover their expenses, it may be time to develop a tailored solution.
Incorporating Social Security
Here are a few ways to help understand and incorporate Social Security and insurance products into a client’s retirement income strategy.
Use a Social Security tool
Decisions about when and how to file for Social Security benefits will impact a client’s income and lifestyle for the rest of their lives. While financial professionals can’t provide advice related to Social Security benefits, using a Social Security tool can help clients visualize what their benefits might look like, guide them to the appropriate choice, and uncover new opportunities.
Show how an annuity or life insurance can help
If after compiling essential retirement expenses and examining potential Social Security benefits you determine clients have an income gap, it’s time to examine which financial products might be suitable for a portion of their portfolio to provide more guaranteed income. You can use an annuity income calculator or illustration software to determine the premium amount needed to generate additional annuity income to help fill in any gaps or expense needs.
If clients have a need for death benefit coverage, a life insurance policy can provide protection as well as potential for additional income resources in retirement. A personalized illustration can show the client how the policy could work for their situation.
Helping Clients See The Value
Developing a formalized retirement income strategy can help address many of the risks retirees will face as they start to decumulate their savings. This process should be a crucial part of every financial strategy, though many clients simply don’t understand that.
But by having a plan in place, clients can set realistic expectations of income and expenses, have clearer direction on how to achieve their goals, and head into retirement with the confidence that they can live the retirement lifestyle they have envisioned.
2Policy loans and withdrawals will reduce the available cash value and death benefit and may cause the policy to lapse, or affect guarantees against lapse. Withdrawals in excess of premiums paid will be subject to ordinary income tax. Additional premium payments may be required to keep the policy in force. In the event of a lapse, outstanding policy loans in excess of unrecovered cost basis will be subject to ordinary income tax. If a policy is a modified endowment contract (MEC), policy loans and withdrawals will be taxable as ordinary income to the extent there are earnings in the policy. If any of these features are exercised prior to age 59½ on a MEC, a 10% federal additional tax may be imposed. Tax laws are subject to change and you should consult a tax professional. Annuities are designed to meet long-term needs for retirement income by providing tax deferral, a death benefit during the accumulation phase, and a guaranteed stream of income for life.
Distributions from an annuity are subject to ordinary income tax and, if taken prior to age 59½, a 10% federal additional tax.
Allianz Life Insurance Company of North America, its affiliated companies, and their representatives and employees do not give legal, tax, or Social Security advice. Encourage your clients to consult their tax advisor or attorney. Clients should contact the Social Security Administration or www.ssa.gov regarding their particular situation.
Guarantees are backed by the financial strength and claims-paying ability of Allianz Life Insurance Company of North America.
*Allianz Life Insurance Company of North America conducted an online survey, the 2019 Allianz Life New Year’s Resolution Study, in November 2019 with a nationally representative sample of 1,307 respondents ages 18 years or older.