Longevity really begins at retirement
By Mike Janky, CLU,ChFC,CFS,RHU,CAS,CASLMr. Janky is a Registered Investment Advisor and President of Forward Strategies Insurance Brokerage in Tucson, Az. Connect with him by e-mail at [email protected] or visit his site: www.fsib2000.com
As we all know, one of the biggest concerns for people retiring is making sure they have enough income to continue their standard of living during retirement and not run out of money at the same time. Years ago, from an advisor’s standpoint, income planning was much simpler. Rates were higher, the stock market could be counted on to give good returns and you could figure on taking safely 5% income off of a person’s assets and you were pretty safe in assuming that the principal would either stay the same or even increase each year. Well clearly demonstrated in the last decade, those days are gone. So how do we generate enough income for our clients and also make sure they do not end up running out of money and on Medicaid? Let’s look at some options that can help with this ever-increasing problem.
Using insurance products to meet the need
As interest rates continue to hover around all-time lows and with the Fed’s assurance that rates will be kept low for the foreseeable future, clients are looking for ways to increase and guarantee their income. There are a number of ways you can use annuities to help meet this need which we will elaborate on.
Income riders on annuities hit the marketplace a number of years ago and continue to gain in popularity. The main benefits of an income rider are that you can guarantee two key components for your client. The first one is that you can guarantee that their money will increase by a certain percentage each year they defer turning on the income. This can be around 7% or so depending on the carrier. This increase can continue each year for sometimes as much as 20 years. Knowing your income account value is increasing each year is very comforting for many clients. The second component is that when a person does turn on their income, they can be guaranteed that they will receive that income for as long as they live. Knowing they will not outlive their income also provides a peace of mind that many are searching for.
There are a number of things to take into consideration when looking at income riders that you and your clients should discuss. First, most of these income riders have a cost associated with them. This can vary greatly depending on the carrier. It can be as little as .50 bases points to over 1% a year. Depending on the carrier and the interest credited, the client could see their account value actually decrease due to the cost of the rider. Secondly, not all income riders are created equally. One may have a higher roll-up rate but then have a lower payout percentage when a client turns the income rider on. It is very important to understand when the client is looking to turn the income on and then you run the illustrations and compare the products side by side.
At the end of the day, the single most important thing to focus on is how much income the client will receive. Just because an income rider has a higher roll-up or a higher percentage payout, does not necessarily make it the best option for your client. Another thing to make certain you are clear with your clients on when discussing income riders is that they understand that they increase in value is specifically for their income value and not their accumulation value. Most of these riders only pay benefits if and when a client turns the income on.
If the client surrenders the contract or passes away, most times their beneficiaries will only receive the accumulation value. Now there are a few contracts that do provide additional death benefits using the income value but there could also be some restrictions on how soon the money is paid to the beneficiaries. Like everything else, it’s key to make sure you understand the nuances of the product and that your clients do as well. Income riders offer many clients the protection and security of knowing if they enjoy a long life, they will continue to receive income and can budget accordingly.
Single premium immediate annuities offer the client a way to not only create an income stream that they cannot outlive, but they can create this income in a tax-advantaged way. Once again the motivation for someone using a SPIA is to know that no matter how long one lives, they cannot outlive that income stream. Using a life contingency option on the SPIA payout will guarantee that income. Knowing this income will be there for as long as a person is alive, can help with budgeting and also remove the worry of running out of money.
In our current interest rate environment, they payouts on SPIA’s are not what they once were, but we also have to look at alternatives. Certificates of Deposits, Money Markets and other safe type of options have continued to decrease in rates over the last decade and for many people, these choices simply cannot provide enough interest for them to be viewed as a viable option. When you also throw on top of all this that tax rates are most likely going to increase over the next few years, the picture just keeps getting worse.
One of the advantages of using non-qualified money to fund a SPIA is that you receive an exclusion ratio on the payout. This exclusion ratio is applied to the payout and is the amount excluded from being taxed. You can create an income stream that allows a client to keep more of the money for themselves and less to Uncle Sam. Keep in mind that there are limitations to the SPIA that needs to be addressed before signing the application. When you elect an immediate annuity, you will lose control of those assets. The client no longer has the ability to change their mind and pull out money of the SPIA in case they decide they want or need more than what the immediate annuity is providing in income. It’s important to have other assets set aside to be used for emergencies or other possible needs.
Time to face the music
No one wants to hear that they cannot generate the income sufficient to continue their standard of living while also guaranteeing that they will not outlive their assets. Unfortunately, many people have not amassed the amount of money needed to accomplish the aforementioned goals in this current interest rate environment. As planners, it’s our job to try and figure out ways to give our clients what they want. The hard reality is that for a lot of clients and prospects, the numbers just don’t match up. So what is a client to do who has $200,000 of assets and is spending $2,000 a month out of those assets to pay their monthly bills?
As planners and advisors, we have to continue to be creative and look for ways to get as close as we can giving them the income they need while also protecting that income stream. As people continue to retire with less and less money available to supplement their income, they will have to make adjustments as well. This could mean things like looking at their budget and determining if they really can afford things like eating out 5 nights a week, full cable including HBO, a new car every other year, 4 vacations each year and so on.
Also, are they paying premiums on things like Medicare Supplements, LTC policies or life insurance policies? For Medicare Supplements, you might be able to help them keep the same coverage for less premium or change plans to help them save money. For LTC policies, you might be able to help them reduce premiums by lengthening the elimination period, shortening the benefit payout length or reducing the daily or monthly benefit. When clients have life insurance policies they are currently paying premiums on, several options could include reducing the death benefit, electing a paid-up policy or doing a 1035 into a new single premium life policy thus freeing that monthly premium up to be used for other wants and needs.
It’s not easy having these conversations but at the end of the day, it is our job to try and find solutions to our client’s challenges and by talking to them about their goals and concerns, we can often help them realize what is most important and then focus on ways to improve their situation. Income will continue to be a top concern for people who are retired so the more you can come up with creative ways to help them increase and guarantee that income or ways to help them budget and make that income last longer, the more clients you will have.