For many prospective clients, the path to a comfortable retirement centers on storing up cash in traditional safe havens–money market funds, certificates of deposit and savings accounts.
For registered reps, the path to a successful close with such clients starts with pointing out the obvious disconnect–that the money may be "safe," but the returns are likely to disappoint when retirement rolls around.
"We as advisors have to determine whether the vehicle in question matches up with the goal," says Mark McCandless, a financial planner and vice president of RAV Financial Services, Beachwood, Ohio. If the client is thinking about retirement, the question to ask is whether the assets in a cash account will generate a sufficient return to offset inflation, plus any current taxable income.
If the answer to that question is "no," then an insurance product may be just the solution to meet the client's long-term retirement planning objectives. One reason: tax advantages.
Funds accruing in the cash accumulation component of a permanent life insurance policy grow tax deferred. That can have a huge impact on the client's retirement nest egg, particularly in the case of variable and variable universal contracts, the subaccounts for which are invested in equities that potentially can yield high rates of returns.
The variable annuity is another long-term savings vehicle that gets high marks. Reps say VAs, particularly those offering a guaranteed income rider, appeal to clients who want to secure a guaranteed income stream that meets at least part of their long-term retirement needs. And while the product offers upside potential to meet targeted rates of return, its income guarantee protects clients against loss due to market downturns.
Roger Green, a principal at Green Financial Resources, Duluth, Ga., says he has more than $100 million in client assets invested in VAs. The assets are typically combined with other equity vehicles, including open-end and closed-end mutual funds and exchange-traded funds.
"Most retirees don't care about their net worth, only what that net worth will produce in terms of cash flow," says Green. "If they have a guaranteed income stream, they also don't care as much about the market's volatility."
Fixed income products have their place in the client's portfolio, too, when conditions warrant their inclusion, say reps. For instance, the traditional fixed annuity should be considered when interest rates–and thus annuity payout rates–are high.
Green notes that so long as the interest yield on a fixed annuity exceeds the client's targeted rate of return, then leveraging the vehicle makes sense. He adds that fixed annuities were very attractive when interest rates were very high.
McCandless agrees, but observes that the fixed annuity appeals to few of his clients in the current market environment. Diversification within an equity-based portfolio, he says, offers the best route to financial security, including portfolios that feature a fixed component. Example: a bond fund that resides inside a variable annuity. Or an indexed annuity, which links credited interest to gains in a market index but also has the guaranteed minimum interest rate promised by traditional fixed annuities.
