Many people enjoy rolling up their sleeves and tackling jobs. But if doing it yourself isn't a viable choice, is there a professional handyman to call for help?
That's a question for consumers who increasingly are being asked to ensure their own secure financial future themselves, even as defined contribution retirement plans continue their steady march toward dominance in the U.S. employer-sponsored retirement arena. Financial advisors must step into the role of financial handymen and women, providing tools and expertise to help clients meet the challenge.
As with any project, successful completion of a financial plan relies on having the right tools. Variable products can be the right tools for a wide range of advisors and clients. In fact, combinations of variable products may be ideal to meet the varied needs of customers.
Like starting a project with a blueprint, a financial plan needs to start with a thorough assessment of client needs and wants. For retirement income, it likely starts with an assessment of the client's fixed expenses–bare necessities that must be paid month after month.
To maximize the stream of income (meaning highest monthly payment for the lowest cost), few tools can beat a lifetime variable immediate annuity. A VIA provides a starting income based on the premium amount and a chosen assumed investment rate. Upon choosing an AIR (say 5%) and the VIA's investment options, the customer begins receiving income, perhaps with monthly payments remaining level for the rest of the initial contract year.
At the end of year one, the monthly payment is adjusted depending on how the underlying VIA investments tracked the 5% AIR. If the investment choices returned more than the 5% AIR, the contractual payments increase for the next year. If they returned less than 5%, the payments decrease. This up and down movement has pros and cons. On the pro side, the policyholder has an opportunity for payment growth that can outpace inflation. On the con side, uncertainty about the monthly payment size from year to year can present a hardship to retirees trying to meet cash flow needs.
A guaranteed payout annuity floor (GPAF) could keep the payment from dropping below a guaranteed level, but these are not yet a widely embraced feature in the VIA environment. However, as demand for income solutions increases with the aging of baby boomers, companies that can develop a strong GPAF paired with an appropriate asset allocation requirement will almost certainly find themselves in the financial advisor's toolbox.
Robert P. Stone, FSA, MAAA, is a consulting actuary at Milliman.
