The magnitude of baby boomers entering retirement is creating what can only be called a "revolution." The retirement assets of this generation can no longer be managed in a traditional fashion; a new planning process will be required, and it will result in new business opportunities for advisors who seize the moment–today.
That will require advisors to take a holistic, "purpose-driven" approach.
Extending the current needs-based focus this way takes into account the different risks facing boomers as they look to retire–risks they didn't bear in the accumulation years. For them, retirement income planning is as much about ensuring a steady, predictable income stream as it is about managing risk in their portfolios; it requires and encompasses a variety of products and investments.
One of the boomers' biggest risks is longevity. This creates a real risk of outliving one's money. In 1950, retirement lasted on average less than 3 1/2 years, because life expectancy was only 68.2 years. Now, in the retirement revolution, millions confront the possibility of living for over 25 years in retirement.
This increased lifespan comes at a hefty price: burgeoning health care costs. Since few employers provide post-retirement health care benefits, clients now face the challenge of funding these growing costs while still trying to have enough to enjoy a comfortable retirement. Additionally, long term care costs have the potential to devastate accumulated assets and income.
Due to these risks, even an affluent 65-year-old couple with a million-dollar nest egg could find themselves penniless later in retirement. A 3-year bear market could leave them financially destitute by age 77. If one partner moves into a nursing home by age 70, money could run out by age 82. Even without market downturns or health care crises, if they live the same lifestyle as when of working age, their money will run out at age 89.1
Changes in sources of income are another significant risk. With Social Security diminishing and traditional pensions vanishing from the landscape, more of the burden for retirement funding is falling to the individual. Future retirees must reconsider how they may need to make up any potential gap.
With a possible span of 20-40 years in retirement, it becomes clear that clients will need to stay invested in the market, to ensure income and assets keep pace with inflation. Market risk is something that can't be ignored. Retired clients can't withstand the impact of market volatility on assets because they have no earning power. The component of protection is as critical now in retirement as it was when clients were accumulating those assets.
Advisors who will succeed in this market will be those who focus on "purpose allocation." That is, they will concentrate on thinking about packaging products they can offer in a way that provides clients with adequate income yet maintains a certain level of protection and risk management, and still allows clients to accumulate assets, recognizing the increased time this income stream will be needed.
It will be imperative for advisors who have relied traditionally on one or two product/investment types to expand their practice to include additional products that can make this planning process more efficient and effective in meeting client needs.
A holistic retirement income planning approach will require consideration of mutual funds, life insurance, annuities and other investments. These products can work together effectively to help clients not only provide an acceptable level of income but also to ensure their assets continue to grow and are protected so they last throughout the retirement years and are passed on to heirs appropriately.
Additionally, hybrid products may offer a mix of solutions not available with single stand-alone products. This will enable advisors to meet multiple client needs more effectively. Products offering growth potential with the protection of guarantees are as applicable in the income stage of life as they were in the accumulation stage.
The time is now to capture client mindshare on this issue. Evidence shows most clients experience a heightened level of awareness of retirement approximately 5-10 years before they actually "retire." It's at this point that they realize that all of the years of accumulating assets actually had a purpose beyond pure accumulation. Clients will begin to search for advisors who are prepared and able to help them transition these collected assets into a renewable income stream.
By moving away from a product-centric approach, advisors can more creatively approach this retirement income challenge. The purpose-allocation approach refocuses client service on the ultimate goal: appropriately meeting the multiple needs of clients with the most effective combination of available products.
Heather Dzielak is vice president-individual annuities business line leader with Lincoln National Life Insurance Company, a Hartford, Conn., affiliate of Lincoln Financial Group.
