It is a statistical fact that when you sit across the table from your clients, assuming the couple is both aged 65, you can expect that one will live to age ninety-two and a half! That means you must plan an income stream of more than 25 years at a minimum, because half or more of your clients will live that long.
Ask your clients which of these two issues are more important—not running out of money or leaving more to their heirs. They will likely choose the latter.
What are we as a financial advising community doing to prepare people for this?
You can help your clients avoid misfortune with a financial product suited to address that risk: the annuity.
Some people seem unaware of the longevity risk altogether, scoffing at any suggestion that they might live to ninety or longer. Others may be aware of that risk, but not aware of the strategic value of annuitization to achieve their objectives.
When we begin to discuss annuitizing assets to protect against very long life, there is a huge sentiment against the concept, even if hidden, that must be overcome. Asset conversion to income streams is not widely considered desirable. However, this will become the future of retirement income planning as the awareness grows by consumers and their advisors of the real risk of outliving assets.
Quite contrary to the public’s perception of annuities, they are actually designed to distribute income on a life-contingent basis. Yet, many advisors seem to regularly advise against the use of annuities in retirement planning. Those advisors – us – communicate to them that we can outperform annuities by other investments, using a rate of return rather than best chance of success as the measuring stick.
In articulating the uncertainties inherent in planning for time frames of 30 years or longer, the Ameriks-Veres-Warshawsky study proposed the idea of incorporating the use of immediate annuities for 25 percent or 50 percent of the retirement portfolio.
Therefore, your clients should consider annuitizing for the following reasons:
- The retirement accumulation is there for income generation.
- It increases the likelihood of achieving their goals.
- Tax advantage for nonqualified assets.
Now, ask your clients, again, which of these two issues are more important—not running out of money or leaving more to their heirs.
