Retirement income planning is one of the most important and most challenging aspects of financial planning for your clients. Will they be able to generate the level of retirement income needed to support their desired retirement? Will they be able to meet their retirement income goals without running out of money?
Lifetime Income
Lifetime income refers to income sources that will last for your lifetime. This means that this income is not subject to the ups and downs in the stock market or the direction of interest rates. These are fixed streams of lifetime income that your client can count on through thick and thin.
What Are Lifetime Income Options?
Social Security and a pension are good examples of lifetime income options. Your clients cannot outlive either of these assets; they provide income for their lifetime. Depending upon the annuitization option, pensions can provide lifetime income to a spouse as well. There are survivor's benefits for Social Security as well.
Over the years the number of employers offering pensions, especially in the private sector, has dwindled. There are some who have concerns about the viability of Social Security benefits as well. Annuities are another source of lifetime income offered through insurance companies.
Lifetime Income Annuity
As the number of pension plans has shrunk in recent years, one option for clients looking for a guaranteed lifetime stream of income is the lifetime income annuity. A lifetime income annuity can provide several benefits for clients, including:
- Guaranteed income for life, including for a beneficiary as well in some cases.
- Diversification of their retirement income sources.
- A stable and reliable source of income.
How Does a Lifetime Income Annuity Work?
A lifetime income annuity works much like a defined benefit pension plan in that it provides a guaranteed income source for life. Your client's premiums go toward funding this benefit. There are several types of lifetime income annuities, including fixed lifetime income annuities, which provide a benefit that starts immediately or one that is deferred until a specified date in the future.
A fixed annuity with guaranteed lifetime withdrawal benefit provides a guaranteed income for life that depends on the date your client chooses to begin receiving the income.
Both types of lifetime fixed income annuities offer several payment options that can be tailored to your client's needs.
Emergency Savings Account (ESA)
Unexpected expenses happen at all stages of your clients' lives. An unexpected expense can be very disruptive if your client doesn't have access to an emergency fund that can be used to cover these expenses.
What Is an ESA?
An emergency savings account is often a liquid savings account where money is set aside for a "rainy day." A rule of thumb is to strive for an emergency fund that would cover six months' worth of normal living expenses.
Some people will focus on establishing an emergency savings account at the expense of putting away enough for retirement out of fear that they won't be able to access these funds in an emergency.
In light of this, the Enhancing Emergency and Retirement Savings Act would provide easier emergency access to money in employer retirement accounts and IRAs on a limited basis each year for emergencies. Other legislation making its way through Congress, including the Secure Act 2.0 package, has its own emergency savings provisions.
What Are the Benefits of an ESA?
Having an ESA and emergency access to money in retirement accounts can help clients meet unexpected expenses without having to dig themselves into a financial hole. This allows them to save and invest for retirement knowing they can meet emergencies that might arise. Having the option to withdraw money in an emergency without penalty could encourage more workers to participate in retirement plans.
What Is a Personal Pension Plan?
A personal pension plan is a defined benefit plan that allows small-business owners and the self-employed to save more for their retirement. They are similar to defined benefit pension plans for larger employers in many ways.
Are PPPs Available in the U.S.?
PPPs are available in the U.S. through Charles Schwab and a number of other custodians.
How Does a PPP Work?
A PPP is a defined benefit plan. The contribution amount will be based on their age, the time remaining until they wish to draw a benefit and the level of the benefit they wish to draw each year in retirement. An actuary will be involved in the process as well.
Generally PPPs are geared to those who can make higher levels of annual contributions — $90,000 or more. Contributions are all made by the employer and are tax-deductible for the business entity. Contributions must be made on an annual basis.
Liability-Driven Investing
Liability-driven investing is an investment strategy that seeks to match investment assets with future liabilities. This is a very common approach to managing the assets of a defined benefit pension plan and is becoming an increasingly popular approach for financial advisors managing the assets of individual clients for retirement.
What Is Liability-Driven Investing?
Using a defined benefit pension plan as an example, the plan's investments would be managed to minimize risks and with the goal of being able to fully fund the plan's liabilities. These liabilities are the pension payments that will be due to current and future beneficiaries. This is calculated annually during the plan actuary's review of the plan's funding status.
