Retirement income planning has long been a puzzle. Pre-retirees often haven't focused on creating income despite their ticking retirement clocks. Financial advisors, companies, and the government have all preached asset accumulation, but paid too little attention to the income Americans will need when they retire, and rising financial markets have made consumers overconfident about their retirement security.
But that was then. Today, the retirement income puzzle is easier to solve. Changing consumer attitudes, new government incentives, and better financial solutions such as variable annuities with lifetime withdrawal guarantees are removing the barriers to effective income planning. It's easy to see why.
According to the Federal Reserve, the economic meltdown and recession led to the evaporation of $1.3 trillion in personal wealth. Although the markets have rebounded, Americans are still worried about outliving their incomes. In fact, according to the Prudential study "Impact of the Market Crisis on Retirement Preparedness," almost 90 percent of those surveyed wished they'd protected their money better from market losses, and just over 80 percent said they were more cautious now with their retirement assets.
Furthermore, consumers who experienced 30 percent losses in their 401(k) plans learned the hard way that 401(k)s are vulnerable to market fluctuations, which erode can values today and reduce income streams tomorrow.
Enter Washington policymakers. In a well-publicized move, President Obama announced plans to promote annuities and other forms of guaranteed lifetime income; he believes this will reduce the risks of retirees outliving their savings. Congress is also considering new laws that would provide greater incentives for lifetime annuity or 401(k) payouts, as well as mandate disclosure of projected retirement income on 401(k) statements.
Insurers, too, have responded by redesigning their variable annuities and living benefits to reflect the current economic climate, ensuring their long-term sustainability.
Now that the retirement puzzle pieces have fallen into place, how should you respond? First, help your clients get serious about retirement income planning. Second, help them protect their income from market fluctuations in the "Retirement Red Zone," the critical years just before and after retirement.
For starters, here are two common planning approaches to consider
1. Keep contributing to a 401(k); then, at retirement, roll savings into a single premium immediate annuity (SPIA)
This approach has the benefits of simplicity and efficiency; however, as recent history suggests, the risk of 401(k) principal loss can be substantial. Plus, clients may decide to take out 401(k) loans and never repay them. When they retire, they might also take their money as a lump sum — and use it for purposes other than income. In fact, according to the Brookings Institution's Retirement Security Project, only about 2 percent of 401(k) participants choose to convert their savings into annuities at retirement.
