If you provide retirement planning services, creating a financially secure retirement is likely the main goal you’re trying to help your clients achieve. As you work with clients on their retirement income planning, you should be aware of some common obstacles that prevent many people from reaching this goal.
Here are 5 retirement roadblocks to help your clients plan for, along with solutions that can help clients overcome them:
Roadblock #1: Inflation
Almost everyone is feeling the pinch of inflation these days. While some inflation is normal and even healthy from an economic standpoint, the elevated inflation we’ve experienced recently has been a major retirement roadblock for many retirees. Even low inflation can have a significant impact on a well-crafted retirement plan.
For example, if the annual inflation rate held steady at the Federal Reserve’s target rate of 2%, $100 today would equal $148 in purchasing power 20 years from now. In other words, it would take $148 in 20 years to purchase what $100 buys today. A retirement plan that doesn’t account for inflation could leave your clients without enough money to live the retirement lifestyle they desire.
A fixed index annuity (FIA) with a lifetime income rider is one tool that can help your clients overcome this retirement roadblock. With this tool, clients can receive a guaranteed minimum income for life along with protection against market downturns. Some FIAs also include features that allow income payments to grow over time, meaning a client’s purchasing power can potentially keep up with inflation. This removes some of the uncertainty associated with how long-term inflation could impact your client’s retirement income planning.
Roadblock #2: Taxes
You know the old saying: The only things certain in life are death and taxes. And it’s likely that taxes will go up in the future, especially with the provisions of the Tax Cuts and Jobs Act scheduled to sunset at the end of next year. Also consider that more than 50% of all U.S. dollars were printed in 2020 and 2021, with $13 trillion printed in 2021 alone.
Many people assume that they will be in a lower tax bracket when they retire since they aren’t earning as much money. But when you consider that the national debt now exceeds $34 trillion — or more than $266,000 per U.S. taxpayer — is this really a safe assumption to make? This money must come from somewhere, and that somewhere is likely to be higher taxes.
An indexed universal life (IUL) insurance policy is one retirement income planning tool that can help clients overcome the tax roadblock to a financially secure retirement. A properly structured and funded policy can provide tax-free distributions of income in retirement, which can help a retirement portfolio last longer, mitigate tax risk and diversify income sources for retirees.
Roadblock #3: Social Security
When signed into law in 1935, Social Security was designed to be a supplemental source of income in retirement for most people, not their main source of income. However, today it provides the bulk of retirement income for 90% of retirees. The question every retiree must answer is: When is the best time to start taking Social Security distributions?
These can begin as early as age 62 and as late as age 70, with a designated Full Retirement Age falling in between those two markers. Retirees receive an 8% higher monthly benefit for every year past their Full Retirement Age that they delay receiving benefits. Also, up to 85% of Social Security benefits could be taxed if individuals are still earning income in retirement.
Deciding when to receive Social Security benefits is highly personalized — there’s no single answer that’s right for every retiree. It depends on a wide range of factors including marital status, tax situation, health and family longevity, children and spouse, and other sources of income. In fact, there are 567 different ways that a married couple could claim Social Security benefits!
Tarkenton Financial offers tools you can use to help devise the best Social Security distribution strategies for your clients, based on their unique circumstances and needs.
Roadblock #4: Market Volatility
Financial markets are inherently volatile, even in the best of times. But this volatility can be especially dangerous for retirees and near-retirees due to sequence of returns risk. This is the risk of negative market returns occurring either late in a client’s working years or early in their retirement, especially as they begin to draw income from their portfolio.
The order and timing of negative investment returns can have a big impact on how long a retirement portfolio lasts and a client’s lifetime income strategy. If there are losses in a portfolio during the early years of retirement while income is also being withdrawn, the chances of running out of money in retirement increase drastically. This is why Reliability of Income may be a more important ROI than Return on Investment when it comes to retirement planning.
A fixed index annuity is one tool that can help your clients manage market volatility and reduce sequence of returns risk. FIAs offer full protection of principal along with growth potential. Because the funds in an annuity are not invested in the market, they will not lose value due to a market downturn. This means your clients don’t have to accept a cut in their retirement spending and lifestyle due to negative returns on market investments.
Roadblock #5: Long-Term Care
The high cost of long-term care (LTC) has derailed many well-laid retirement plans. The national median cost of an assisted living facility is $64,200 per year while the national median cost of a home health aide is $75,500 per year, according to the Genworth Cost of Care Survey. With life expectancies rising, seven out of 10 people will need long-term care at some point during their lives.
Medicaid covers some LTC costs but there are strict financial requirements associated with the program that may require individuals to spend down their assets to qualify. While Medicaid can be a safety net for those with limited financial resources, it may not be suitable for individuals and couples who want to choose where they receive care or want to leave a legacy for their loved ones.
A hybrid LTC insurance policy is one tool that can help your clients pay for long-term care expenses in retirement. This type of insurance is an alternative to standalone LTC coverage, combining life insurance or annuity benefits with LTC needs, typically in a single-premium purchase. A hybrid LTC policy offers more flexibility and options, allowing clients to manage risks by eliminating future premium increases. Plus, any money remaining in the policy (whether the policy is ever used or not) will be passed to beneficiaries.
Give me a call at 404-364-2598 or email me to talk more about how solutions like these can help your clients navigate these five retirement roadblocks. I can also explain how our proprietary Retirement GPS presentation can help you present these challenges (and solutions) to your prospects and clients.
SOURCES:
https://www.calculator.net/inflation-calculator.html?cstartingamount2=100&cinrate2=2&cinyear2=20&calctype=2&x=Calculate#forward
https://investor.genworth.com/news-events/press-releases/detail/972/genworth-releases-cost-of-care-survey-results-for-2023