Retirement Income Planning and Aging: The Role Of Annuities

Retirement Income Planning has become an important topic with the aging of the baby boom generation. Many refer to it as preparation for the decumulation stage in an investors’ life cycle. Some use analogies of the accumulation stage as climbing the mountain and the decumulation as scaling down the mountain. Climbing Mount Everest is indeed treacherous, but believe it or not, most explorers of this behemoth have died on the way down. Mistakes made in retirement planning can also be fatal, costing the client a worry-free retirement.

The basis for all retirement income planning is the clients spending goals and objectives in retirement. The sophistication of financial planning software enables advisors to simulate varied scenarios to arrive at a benchmark retirement income plan. The usual risks in retirement- longevity, inflation, interest rate, and sequence of returns can be simulated. While all risk assessments are quantifiable, the hardest to predict is failing health. 

Aging like death is inevitable. As the famous economist John Maynard Keynes once put it:” in the long run we are all dead.” If there is one thing that will crack the dike in a retirement plan, it is changes to our health. Discussing aging and frailty risk and its realities can often be uncomfortable. It’s not the fun part of the discussion like taking vacations, buying a boat, or purchasing a retirement home in Florida. Whatever the uncomfortable nature of this topic, it must be addressed. All retirement income plans start with spending goals. Spending habits shift as we age.  

Many seniors over the age of 55 don’t consider the effects of long-term care on their retirement budget. This is a problem since over 70 percent of people over age 65 need some form of long-term care. But most people don’t purchase long-term care insurance. Whether it’s denial or procrastination, people wait until they’re too unhealthy or too old to purchase long-term care insurance. This is where annuities may be the answer. 

Many fixed indexed annuities (FIA’s) have income riders. These income riders can be purchased for a nominal fee and guarantee the owner a lifetime income stream. These products also have a death benefit protecting the spouse or for providing a legacy for the heirs. It also has the crediting strategies of an FIA that allows for growth in the accumulated value- and of course, they never lose principal. 

They also have another feature: An enhanced benefit that’s tied to the lifetime income rider. These products are designed to pay twice the lifetime income rider and are triggered by the client’s inability to perform two activities of daily living (ADL’s). 

Demonstrating the enhanced benefits for healthcare should always be discussed in the same breath as the tax benefits, principal protection, and guaranteed income for life. It will help the client see the benefits of an annuity and how they can protect a client in retirement.