CREATING BALANCED RETIREMENT
DISTRIBUTION WITH GROWTH AND GUARANTEES
Michael H. Korthaus

Michael H. Korthaus is Vice President, Financial Institution Sales, Protective Life Insurance Company (Birmingham, AL). He can be reached at (513) 362-1553 or via email at mike.korthaus@protective.com. For more information, visit Protective Life Insurance Company.
 

 
 

TUMULTUOUS. That one word sums up the events of the last 12 months. 401(k) balances have been cut by as much as 50 percent. Clients nearing or in retirement are left with a lot of questions and fear over what to do with their retirement.

There is a silver lining underneath those clouds of uncertainty. And, there's a way you can provide your clients peace of mind when it comes to making sure their retirement income lasts for as long as they live.

Think for a moment about what your clients need to spend for every day expenses. Do they go away? No. Do they go down in price? No. How long do they last? For the rest of their lives. Understanding this, it's easy to see that the key to retirement income planning is finding special assets that produce guaranteed income that matches those expenses.

To determine how much guaranteed income your clients will need, try looking at asset characteristics versus asset class when developing a plan for your clients.

Allocating assets based on income needs

The retirement income pyramid shown on this page introduces the concept of allocating assets based on income needs and shows how certain assets should be allocated to meet those needs.

Some retirement income needs have different characteristics than others, so assets should be allocated in a way that best meet these characteristics.

Matching specific income sources to specific income needs based on the asset characteristics is key to creating successful retirement income strategies for your clients.

This approach requires that you begin looking beyond the traditional approach of allocating a client's assets solely based on asset class and risk tolerance and shift to a model that also considers asset characteristics as part of the equation.

For example, Essential Income should provide for food, shelter, clothing, prescriptions, etc. Therefore, your clients will want stable, reliable, inflation-adjusted, lifetime income to pay for those essentials. However, for their legacy, your clients will want assets that receive a step-up in basis at death, have other tax advantages, and avoid the delays, costs and publicity of probate.

Once you understand the three types of assets and how their characteristics align with their specific uses, it becomes clear that some sources of retirement income fit better in some categories than others. This process of matching specific income sources to specific income needs based on the asset characteristics is the key to creating successful retirement income strategies for your clients.

You may be relatively comfortable designing portfolios that can address your clients' lifestyle and contingency needs as well as legacy needs as they generally include products you sell every day—life insurance, money market accounts, qualified plans, stocks and mutual funds. However, you may often find yourself struggling with how to best meet a client's essential income needs. This isn't surprising due to their critical nature. Their availability and security is vital to your clients' lifestyle. Therefore, it is important that your recommendations are ones that will secure the income your clients will need.

There are three commonly used sources to meet essential income needs—continued employment, Social Security and pensions—that will more than likely need to be supplemented.

It's important that you understand the types of assets that are commonly used to meet essential income needs. There are three commonly used sources—continued employment, Social Security and pensions—that you have little-to-no influence over. These income sources are likely at the core of your clients' retirement plans and will more than likely need to be supplemented by other sources of income.

Annuities can play an important role in supplementing those income sources. They provide the guarantees your clients are looking for as well as potential for growth.

Immediate annuities

Immediate annuities can be an ideal source of essential income for many reasons. They provide consistent, regular, reliable payments that can be guaranteed to last for a lifetime or over the joint lifetimes of two spouses. Many immediate annuities also offer inflation protection features that provide for a specified annual increase in the payment amount.

Variable annuities

Today's variable annuities offer a variety of optional features, including guaranteed lifetime withdrawal benefits. With these options, variable annuities can provide purchasers the opportunity to participate in the financial markets while still offering guaranteed lifetime withdrawals (even over the joint lives of two spouses). These benefits provide the protection of a withdrawal amount that may increase in times of positive market performance, and are guaranteed not to decrease regardless of market conditions.

Let's look at an example to see how immediate and variable annuities can work together to provide guarantees and potential for growth.

Rob and Susan have $200,000 in investable assets. They need half of those assets to supplement the retirement income they're currently receiving from other sources and want the other half set aside to grow until they need to access it.

Their financial advisor suggests $100,000 to purchase an immediate annuity with a 10-year period certain payout option. This would generate a guaranteed monthly income stream of $953 per month with a total payout of $114,409 at the end of the 10 years.

The remaining $100,000 can be allocated to purchase a variable annuity contract with a withdrawal benefit that can double the annuity's benefit base in 10 years. As the variable annuity's contract value fluctuates with the market during that 10-year time frame, the benefit base has the potential to grow to at least $200,000. After 10 years, John and Jane may elect to receive a stream of income payments of up to 5% of the benefit base—which would be $10,000 per year—while having access to the variable annuity's contract value.

Their financial advisor suggests $100,000 to purchase an immediate annuity with a 10-year period certain payout option. This would generate a guaranteed monthly income stream of $953 per month with a total payout of $114,409 at the end of 10 years.

Next Steps

This is only one potential combination among a myriad of options that are available to your clients. Consider teaming up with an insurance carrier that provides a wide array of tools to help you engage your clients in finding retirement solutions—including life and annuity products, client seminars and brochures, needs analysis tools and financial calculators. You'll be adding tremendous value and security to their retirement years by providing them balanced distribution with both growth and guarantees.