If you have read any of our other articles that go into detail about different techniques or strategies for dealing with retirement income planning, you are probably not shocked that we think this is an important discussion. And quite frankly, we think this is one of the biggest boondoggles for financial advisors, investment firms and life insurance companies. <! – ->
The financial sector has largely lost the ball with education and informing consumers about how to think about planning pension income.
The demand for knowledge, strategy and tactical advice on planning pension income has never been greater than it is today. Our industry must help our customers distribute their accumulated wealth conservatively to maximize how long their money lasts. And we must also help our customers manage their pension income efficiently so that they can minimize the tax effect.
Planning for retirement income should be your focus
For several years no one talked about it … at all. The industry was laser-focused on accumulating assets and helping people accumulate wealth. As we mentioned many times before, incentives are important, and the incentives have been that the industry largely generates revenue by collecting and not accumulating by helping clients plan for pension distribution.
When you look at the issue of income distribution in pension income. planning, there are actually a couple of broad problems here:
- Help customers determine their life expectancy risk – how long will the money be
- Help them distribute their assets in the most tax-efficient way possible – which bar do I draw from the first
Back in 2012, we looked at a study completed by Conning Research & Consulting. The study is called " The Big Payout: Individual Retirement Income Opportunities ". <! – ->
The data released from the study is fascinating, and I & # 39; I admit that I was a little surprised by some of the numbers.
Their study concludes that almost half (46% to be exact) of all defined contribution assets (think 401k, 403b, etc.) are currently within individual annuities and group annuities. With the dominant and pervasive funds in recent decades, I did not expect the high proportion of defined contribution assets to be kept in annuities.
While all that information is fascinating, it's just the beginning of the story in my opinion.
Strategies for planning pension income
Life insurance companies, agents and brokers have a huge opportunity ahead of them. We have a chance to help our customers turn these buckets into the income they need when they strike the bell for the last time before rushing out into the sunset.
We are really biased here but …
The insurance industry obviously has the advantage in this war to manage the pension income flows of our baby boomer customers. We have products that guarantee lifetime income and control market volatility. These are two different problems that retirees face. Life insurance companies and their products win both battles – no competition.
Make no mistake but …
The fund industry, investment managers and large wall street companies are all trying to win the chance. They will continue to support ideas like the 4% rule, as it benefits them for you to keep your money invested so that they can charge asset management fees. We're talking about trillions of dollars at stake here. Remember that incentives are important. <! – ->
99% of the financial websites out there drive the investment industry agenda (mainly funds and ETFs). Guess who is sponsoring their content?
Why life insurance companies win pension income strategy
Two major reasons why life insurance companies can win this battle:
- Life insurance companies offer solutions that guarantee lifetime pension income. Keep in mind that the purpose of accumulating a large bucket of pension assets is to generate income during retirement. Do not be swayed by the advisers and agents out there whining about the fact that annuities are too low! Yes, interest rates and ceiling rates are low but your focus should be on producing income. You should spend some time learning how to create your own pension so that you approach retirement with a focus on producing income.
- All life insurance-based solutions, be it cash life insurance, fixed annuities, SPIA and / or fixed index rates help you avoid market volatility. If you have never studied data on the effects of market volatility on pension income … continue reading. It can ruin an otherwise happy pension.
Do not let the sequence of returns ruin retirement income
Below you will find a useful graphic to illustrate the detrimental effect of the return on investment on your future pension. Take a look at this chart showing the year-on-year return for the S&P 500 from 1989-2008.
Note that the average annual return does not change despite the return scheme here.
Simple math … right? Everyone learns in primary school how to calculate average values.
If you are in the accumulation phase of life, no matter what order the return comes, you are not withdrawing money from the market.
But think of the reverse scenario. If you retired in 2008, you would have decreased by -37%. This means that you had three years of losses during your first ten years of retirement. <! – ->
Take a look at the second image (credit: John Hancock ) here to see what happens to an investment portfolio that takes pension income and how the sequence of returns can affect it.
This is very interesting because you can see how inverted order has no effect on the total return when you accumulate pension assets. To the right you can see that when you take the accumulated balance of 684,848 $, you take 5% from the portfolio as an income withdrawal that starts at age 66 and increases the withdrawal for inflation by 3% each year thereafter you get problems if the sequence returns against you early in your retirement.
As we like to say, this idea works until it does not. And in the example shown in this picture from John Hancock, sometime between the ages of 81 and 82, you run out of money.
Do you know what the sequence of returns will be in the future?
Guaranteed Retirement Income is a Winner
The battle over who wins America's retirement income hearts is far from over. Use of Fixed Insurance Contracts – Whole life insurance policies, fixed annuities, deferred income rates, immediate premium income and fixed indexed annuities with guaranteed minimum income take-back benefits ensure that scenarios such as those shown in the charts above never happen to our clients.  All decent fixed index interest rates with a good GLWB (guaranteed lifetime withdrawal benefit) can provide similar if not superior income and with a guarantee that you will never survive it, despite market volatility or the low-interest-rate government-designed environment we have today.
If you want to learn more about how we can help you fight this battle, contact us . We have the tools, skills and resources to help you plan your future retirement income strategy.