Longer Lives, Smaller Nest Eggs…
May 12, 2011 by Mark S. Fitzgerald
Solve for the need. Does that sound like a high school math problem? In fact, solving for the need is the top job for producers with baby boomer clients. These clients, many of whom will live into their eighties and nineties, are inadequately prepared for a post-retirement period that could last 20 years or more. Yesterday’s “retirement planning” has become today’s longevity planning.
Boomers have reason for concern. More than 50 percent of Americans will be at risk of being unable to maintain their standard of living in retirement, according to the Risk Retirement Index,1 from the Center for Retirement Research at Boston College.
Spooked by the very real prospect of outliving their assets, boomer clients are seeking a dependable lifetime income. The good news is that producers have an expanding array of products they can use to help clients develop a plan that includes income, growth and long term care elements. As the 70 million-plus boomers retire en masse over the next several decades, the need for combination products and strategies will only increase.
Some of the trends are already clear: Annuities that offer an optional guaranteed lifetime withdrawal benefit (GLWB) rider are very popular. For the second half of 2010, the GLWB purchase rate was 65 percent, according to LIMRA.2 That’s easy to understand. Fixed or variable annuities with GLWBs offer the insurance boomer clients what they want most—an income they can’t outlive, regardless of market performance.
Even if guaranteed withdrawals deplete the account value to zero, the client is guaranteed the benefit amount specified by the GLWB rider for life. For clients with long life spans, the return on annuities with GLWB riders can be very favorable.
A Solution for Setbacks
Annuities with GLWBs can also be a lifesaver for people whose financial plans have been derailed by a job loss or other unexpected events, which could include earlier-than-expected retirement, portfolios depleted by the financial crisis, or serious health problems.
A big selling point for both the annuity and the rider is the upside for growth if the market does well, which can be a good hedge against inflation. Since these are not direct investments in any market securities, the downside risk is minimized, which is important for people still shaken by the market meltdown.
GLWBs offer some other big advantages that resonate with boomers. The benefit base used to compute insurance fees and guaranteed withdrawals may increase through bonuses, step-ups and roll-ups, rewarding those who postpone taking income. This can be particularly attractive to younger clients who can afford to wait to begin taking withdrawals.
Prescription for Long Term Care Costs
With health care and long term care costs expected to rise sharply in the next few decades, clients are looking to producers for guidance on long term care insurance. In 2010, the national average cost of a private room in a Medicare-certified skilled nursing facility was $90,155 a year, according to a survey conducted last year by Univita Health, which provides independent living resources for seniors. A private room in an assisted living facility averages $3,294 a month. The survey included more than 2,000 nursing homes and 2,000 assisted living facilities nationwide.3
One option to address these or other potential costs is to layer a long term care rider on an annuity. This adds additional security, often providing a range of care options if they’re needed, and it may give clients access to a higher percentage of the account value or allow an accelerated payout, depending on the product’s design and timing. Also, under a 2010 provision of the Pension Protection Act, long term care benefits on a non-qualified annuity linked with a qualified long term care rider can be paid out tax-free.
The market has demanded and the industry has responded with multiple options. With their expanded toolbox, producers can approach each client’s situation with a solve for the need exercise. By adding up necessary and discretionary spending, then comparing it to income sources from pensions, 401(k)s, Social Security and other assets, producers can help identify where the client falls short and most likely identify an annuity, an annuity with GLWB, or a combination of products that can help fill in that gap.
Growing Boomer Demand
With post-employment periods that may span 20 to 30 years or more, boomers could be facing a significant shortfall if they don’t take action. With solve for the need planning help from producers, clients can find the right combination of products, including annuities, annuities with GLWBs and long term care options, to ensure they’re protected financially as they age.
The underlying need for products will continue to grow as longevity planning becomes the norm. It’s up to the insurance industry and producers to be innovative and forward-thinking to get ahead of the growing boomer demand.
1. The National Retirement Risk Index: After the Crash, Alicia H. Munnell, Anthony Webb, and Francesca Golub-Sass, The Center for Retirement Research at Boston College, 2009 Report, www.crr.bc.edu/special_projects/index.php and click on “National Retirement Risk Index” in right column.
2. Data from LIMRA’s Q4 2010 Variable Annuity Guaranteed Living Benefit Election Tracking Survey, published in a March 8, 2011 LIMRA press release.
3. National Cost of Long Term Care Survey. Rep. Univita Health, Inc., June 2010, www.univitahealth.com/media/2010-Cost-of-Care-Survey-Final.pdf
Author’s Bio
Mark S. Fitzgerald
is national sales manager for Saybrus. Prior to this position, he was regional vice president and national sales manager for Phoenix Life Insurance Company, a Saybrus affiliate. He also worked for Liberty Financial in various senior level roles. During his twenty years in the investment and financial industry, he has generated more than $3 billion in annuity assets. He has authored numerous articles for publication about retirement income planning and has conducted more than four hundred seminars on client income planning. Fitzgerald has a bachelor’s degree in finance/economics from Roger Williams University. He also holds his Series 6, 63, 26 and 65 licenses. Fitzgerald can be reached by telephone at 860-306-0886. Email: mfitzgerald@saybruspartners.com.
