In the 1980s, 60% of U.S. companies offered employees pension plans.1 In the decades since, that number has dropped radically to 4%.1 Pensions gave way to 401(k) plans, leaving employees to tend to their retirement savings themselves. The freedom to make decisions about future finances may be liberating to some, but statistics suggest otherwise. Only 41% of eligible employees contribute to a 401(k) plan, and many of those who do enroll aren’t setting aside enough money, investing appropriately, or considering the financial consequences of market downturns.1
The lack of participation in 401(k) plans is complicated by the fact that, unlike pensions, these plans are subject to market volatility and there is no guarantee that a set amount will be paid monthly.2 Overreliance on Social Security to fund retirement could also carry risk since it currently only replaces about 40% of the average person’s income.3 In addition, longer life expectancies, escalating healthcare costs (estimated at $275,000 out-of-pocket for the average 65-year old retired couple over their remaining lifetimes1), and unpredictable cost of living increases could cause a disparity between income and expenses in retirement, generally referred to as a retirement income gap.
Understandably, wealth accumulation has likely been a focus for clients leading up and into their retirement years. However, in light of potential income shortfalls, financial advisors need to adjust client discussions and strategies to include how to protect part of retirement savings to bridge the retirement income gap.
The Income Annuity Strategy
A lack of protected retirement income (other than Social Security) is a very real concern for 48% of U.S. households in the 45- to 72-year-old age range with $75,000 to $1.99 million in investable assets.3 As a group, only 63% are confident they can withstand market downturns or unexpected expenses, compared to 80% of households with protected retirement income.3
Addressing these concerns by introducing an annuity into the planning conversation can be a sound approach for advisors, but choose your words carefully. An income annuity framed purely as an investment is appealing to only 21% of clients.1 On the other hand, 72% of clients chose an income annuity when it was described as a way to provide protected lifetime retirement income.1
Clarifying how an income annuity provides protected income is the first important step in expanding client retirement goals to include ways to potentially eliminate any income gaps. It also provides advisors with a key opportunity to emphasize the many other benefits of an annuity, including:
- Flexibility: Income can be drawn immediately or begin on a future date.1
- Tax-deferred growth: Accumulating money in an income annuity is done tax-free until the money is withdrawn, and may even lower tax brackets.1
- Transferability: Upon death income annuity assets are usually seamlessly transferred to beneficiaries, usually in payout options of their choosing.1
Simply saving for retirement is no longer sufficient for many clients. Planning for the many variables that exist is the most prudent approach to better ensure income for a lifetime, and annuities are a viable solution. It also takes insights and actionable steps like those found in Managing Longevity Risk in Retirement Planning. Click the button below to access your copy of this valuable reference material now.
1Financial Freedom Studio, Bridging the Retirement Income Gap, November 15, 2018
2Protective, What’s the Difference Between a Pension and a 401(k)?, Undated
3Wealth Management, The Importance of Clarifying Longevity Risk, July 24, 2018