How a sound retirement income strategy should drive the planning process
by Wendy McCulloughMs. McCullough is a vice president at Thrivent Financial, leading the company’s solutions design and development team in charge of life, health and annuity product design and positioning for consumers and distribution.
Many American workers today are feeling anxious about retirement and may not be taking the right steps to help prepare for a financially secure future.
According to one national study, just 41 percent have tried to figure out how much money they will need in retirement and only 38 percent have estimated how much income they would need each month.1On a related note, one of our recent surveys found that “saving for retirement” and “making sure my assets don’t run out in retirement” were the top two financial goals for clients.2
In short, there appears to be a disconnect between what Americans want for their retirement and how they’re planning for it. And that may lead to a lack of confidence about their financial situation.
One reason why many Americans worry about retiring with confidence: It’s not easy to know how to prepare for it. People have questions about the topic – everything from how much money they need to retire and which financial products to buy to when to start taking Social Security, how to factor in market fluctuations, minimize taxes and much more.
Financial representatives can answer these questions by guiding clients through a retirement planning process that balances long-term growth and guaranteed income. The ultimate goal is to create a plan that helps them be wise with money, allowing them to cover expenses in retirement, enjoy the lifestyle they want, live generously, and remain financially protected and secure. These are core elements of a client’s retirement income strategy.
So what does a sound strategy look like?
First, representatives should help clients identify ways to produce guaranteed income to cover predictable expenses such as mortgage or rent, utilities, food and car payments.
Guaranteed income is critical. A survey published in the Wall Street Journal found that the more people could count on guaranteed income, the more satisfied they were in retirement and the less prone they were to depression.3
Most people save for retirement by contributing to their 401(k) plans and IRAs during their working life, but when the time comes to turn those assets into income, they often need additional help. Social Security and pension payments may help create a foundation for guaranteed income but they may not be enough to live the life most people envision when they enter retirement.
Financial representatives can help clients follow three important steps to create an adequate income stream in retirement:
- Lay a foundation of guaranteed income sources to cover their “needs” – or essential expenses – in retirement. That includes reviewing any pension plan options and Social Security benefits.
- Define the gap between income that covers their “needs” and what additional income is necessary to cover “wants” and “wishes.”
- Work to fill potential gaps with products that can provide guaranteed income. For example, if they have a 401(k) or IRA, it may be wise to consider converting some of those assets into an annuity.
To determine how to fund the gap, clients may want to evaluate their level of risk tolerance first. We’ve developed a useful tool, IncomeMatch® questionnaire which measures how comfortable a client feels about being invested in markets or about giving up liquidity to get guaranteed income. From there, the representative can develop a tailored retirement income strategy that takes into account their risk tolerance, their income goals in retirement, as well as their needs, wants and wishes.
Advisors must find ways to help clients determine how much of their money should be set aside for income to cover their needs while highlighting their options for using the excess cash to help fund their wants and wishes.
Given the nature of today’s persistently low-interest environment, fixed indexed annuities can be an effective way to help provide income and growth, products that provide an excellent way to counter low interest rates and expect this trend to continue into the future.
Consider the Investment Strategy
Second, financial representatives should help clients consider options for long-term growth in order to help manage the effects of inflation over time. We’re talking stocks.
The upside of a guaranteed income stream is that it provides a sense of lifetime security. At the same time, however, it’s important to remember it doesn’t offer significant growth potential. To counter the effects of inflation and add some cushion to retirement savings, a financial representative may recommend using equity investments to help achieve long-term growth. Representatives and clients should review and adjust investments to help achieve their goals.
Leveraging annuities within a managed account structure in which the client has access to multiple investment options offers another alternative to capture market exposure. This type of annuity is an emerging financial industry product, and it’s designed for people who want to work closely with a representative to build their investment portfolio and are comfortable paying the associated fees.
As the market fluctuates, it’s important that people also have ways to access ‘near-term’ liquidity, such as savings, money market accounts and cash value life insurance.
Sound Protection Strategy
Third, financial representatives should educate clients about having financial protection from the unexpected – death, disability or the inability to live independently.
Most people don’t think about life insurance as part of their guaranteed retirement income strategy. But when one spouse dies, having the right amount of life insurance in place can provide a death benefit for the surviving spouse to ensure the amount of retirement income doesn’t decrease. Similarly, disability and other insurance should be considered to help protect income as they can prevent a drain on resources saved for retirement.
And there are always taxes…
We look to minimize the impact of retirement-related financial changes, and utilize a unique “What-If Tax” tool, which creates different scenarios and then compares the side-by-side tax implications. Some examples of “what-if” decisions include IRA contributions, charitable gifting, Roth IRA conversions, selling appreciated assets or tax implications of life events (e.g. death, disability, retirement, Social Security, annuitizing or taking withdrawals from annuities out of their surrender charge period).
We also focus on helping clients get a big-picture view of their entire retirement plan. For this, there is another useful planning tool: MoneyGuidePro®, a third-party collaborative planning tool that aggregates client’s financial data from other organizations and helps clients keep track of their retirement goals. However, the projections generated by MoneyGuidePro are hypothetical and do not reflect actual investment results, and are not guarantees of future results. ◊
1. 2017 Retirement Confidence Survey (RCS) by the nonpartisan Employee Benefit Research Institute (EBRI) and Greenwald & Associates.
2. Thrivent study: “Profile of people who purchased their first product from Thrivent in 2016,” by Leah Holloway and Gil Young.
3. Annuities and Retirement Satisfaction: They’re not just a reliable source of retirement income—one study says they may make you happier, too. Wall Street Journal (27 July 2005).
About Thrivent Financial
Thrivent is a not-for-profit membership organization that helps Christians be wise with money and live generously. It offers its more than 2 million member-owners a broad range of products, services and guidance nationwide. For more than a century it has helped members make wise money choices that reflect their values while providing them opportunities to demonstrate their generosity where they live, work and worship. For more information, visit Thrivent.com. You can also find us on Facebook and Twitter.