By John Carter
When it comes to retirement income, what's your client's greatest fear? Chances are it's running out of money. Or, more realistically, not having enough income to stay in their home, cover the monthly bills and pay for health care costs.
In fact, a McKinsey and Co. study found that 85 percent of pre-retirees were extremely or very concerned about guaranteeing sufficient income for retirement.
With all the uncertainty in planning for retirement income, keeping your clients from running out completely is challenging enough. Providing enough income throughout retirement is even tougher.
"It is no longer about buying the second house or traveling the world," says Scott Stolz, president of Raymond James' Planning Corporation of America. "It's now about having a comfortable retirement. Generally, advisors understand the need to provide an income source for life that will cover not only essential expenses, but hopefully discretionary expenses as well. The challenge is not the goal, but rather the strategy to accomplish the goal."
Solving concerns about sufficient income often leaves advisors having to make compromises between growth potential and protection. Short-term income security and long-term growth are hard to do effectively in a single portfolio without subjecting it to unacceptable risk.
That's why it makes sense to separate clients' wants from their needs and solve for them separately. Why? There are two reasons:
- To invest for greater confidence for the needs.
- To invest for greater income and growth potential for the wants.
The first goal is to solve for an essential level of income for the needs, consisting of the basics - food, housing, insurance and medicine. Since these are expenses the client must be able to cover, they need a high level of confidence that they'll receive enough income to meet them. At that same time, they probably won't be able to tolerate much downward fluctuation in that income stream.
To answer this need, use an investment that provides highly dependable, steady income to form a "floor" of guaranteed income. This income floor, once established, can really take the stress off of your client and their portfolio.
Matching a guaranteed income source with clients' "guaranteed" expenses not only makes sense, but we believe it's a best practice. Stanford professor emeritus and Nobel Prize winner William Sharpe agrees, advocating "a minimum subsistence level equal to the amount provided by a risk-free asset," adding annuities should be considered explicitly" for this role.
We've long believed in the important role annuities play for retirement income. But, what about the role of a variable annuity with a guaranteed minimum withdrawal benefit rider specifically?
The hypothesis: that a VA+GMWB could enhance the income potential of a typical mutual fund-based systematic withdrawal strategy while reducing the risk of downward income stream fluctuations. We engaged Ibbotson Associates to verify the hypothesis.
Ibbotson determined that a VA+GMWB can not only increase the amount of income generated, but can add stability to the income stream - the amount of income provided each year. And an increasing number of firms and independent researchers are realizing the potential of an income floor with a VA+GMWB. In fact, Moshe Milevsky and Thomas Salisbury found that a VA+GMWB not only secures an income floor, but the added equity exposure creates growth potential inside the guaranteed portion of the portfolio. Said Milevsky, "you can eat (withdraw) more and sleep better at night (i.e. face less risk)."
By incorporating these best practices into your strategies, you can address your clients' two biggest concerns: having to make serious cutbacks in their quality of life, and running out of money completely. This simple shift in thinking can make a big difference in your effectiveness as an advisor, and in the satisfaction of your clients.
John L. Carter is president of Nationwide Financial Distributors, Inc.