As another year passes by, more people join the ranks of retirees. Since 2011, roughly 10,000 baby boomers have turned 65 years old each day, according to Pew Research. It predicts that trend to go on until 2029.
From second-act careers to volunteering and entrepreneurship, baby boomers are already reshaping the mold of retirement. And they are bound to keep redefining it, as record-breaking millions are set to leave the workforce.
With a new era of retirement living on the horizon, it’s prudent to take note of our retirement income planning strategies.
Will they provide reliable income streams and financial security for what could well be a decades-long retirement? Do they give a long-term assurance of you being able to enjoy your desired lifestyle? Or when it comes to these goals, does your income strategy have more of a question mark hanging over it?
In their career years, many people work with a financial advisor to build their life savings and plan to continue so in retirement. One notable survey of 200 advisors by investment company Incapital shows how advisors are preparing today’s retirees for the economic uncertainties of tomorrow.
The survey’s focus? What retirement assets these financial advisors were using to generate retirement income for their clients.
Changing Focus to More Fixed Income
The survey drew respones from advisors from all sorts of firms, including RIAs, wire houses, banks, and independent broker/dealers. Among other queries, the advisors were asked about client reactions to market conditions. They also talked about what they were doing to meet their clients’ retirement income needs.
When asked about investors’ openness to the benefits of fixed-income assets, the advisors said it would take a “significant equity market event” (or market correction) for them to come around. The advisors also described the types of vehicles they relied on in client portfolios.
The different income-paying vehicles were:
- Dividend-paying stocks (used 51% of the time)
- Equity income mutual funds (43%)
- Annuities (43%)
- Bonds (38%)
- Bond mutual funds (39%)
- Bond exchange-traded funds (29%)
Appetite for Risk Lingers But Can Change
Paul Mottola, a managing director at Incapital, recognized the dynamics that long-time low interest rates and a record-setting bull market brought.
“With prolonged low interest rates and the sustained equity bull market, investors seeking income might have become comfortable taking on equity risk to accomplish income needs,” he explained then in a company statement. “That may explain why advisors say it will take a significant correction in the equity markets for investors to appreciate the benefits of fixed income.”
“But with increased volatility in the market, we believe that investors will be [more receptive] to some of the potential benefits of [fixed-income assets], such as portfolio diversification and lower volatility,” he continued.
“This is especially true among investors who have taken equity risk for income, and those who now may be focused on principal protection and a fixed and predictable stream of income.”
Mottola’s statements echo another more recent survey of financial advisors. While, overall, advisors were optimistic about the future, many worried about how lingering risks on the horizon could affect their clients’ well-being.
Some advisors reported taking more defensive positions with their clients’ money for the near future as a proactive guard against downward market movements.
The Rationale Behind Advisor Income Strategies
What about the advisors’ objectives with these income-focused assets? According to the survey, “the top three benefits they seek from fixed income investing for their clients are” the following:
- Providing a predictable rate of income: 53%
- Portfolio diversification: 51%
- Return of principal at maturity: 38%
Risks to Future Income Security?
There are a few risks that can impact the use of fixed-income and low-interest instruments in retirement planning:
1. Interest rates may continue to be low. That will make it harder to use fixed-income assets and other low-risk interest-earning instruments for monthly income streams or other retirement financial goals.
2. Big banks and other financial companies are projecting that future market returns may be lower than those during this 10-plus-year bull market run. While no one can ever know with certainty what the market will do, stock market valuations are currently quite high.
If you are buying stocks or other equity market-based assets at record or near-record highs, you may face reduced growth potential for those assets in the future. Of course, that depends on how long your holding period is for those assets, as well.
Put More Guarantees in Your Income Planning Strategy
No matter what happens, though, nothing beats having financial security yourself. Creating a retirement income plan can help you make the most of your money and be ready for changes as they come.
Not only that, it pays to consider annuities as part of that plan. Here are some strengths that annuities bring to the table:
1. Under annuity contract terms, insurance companies are contractually bound to make monthly income payments to you. Annuities are the only financial vehicle capable of truly paying a guaranteed lifetime income.
2. Fixed annuity premium dollars are generally managed very risk-consciously. Unlike even banks, insurance companies are required by law to maintain dollar-for-dollar reserves for every dollar of annuity premium they receive.
The insurance company pools the premium money into an overall general fund. Thus, the risk for one annuity policyholder is pooled with thousands of other policyholders who have money with that insurance company.
The money from fixed annuity contracts is put into low-risk fixed-income assets such as Treasuries and investment-grade bonds.
3. Insurance companies also use actuarial calculations in their payouts to policyholders. That provides a higher degree of income safety for those who receive the payments.
The expected mortalities of policyholders — known in actuarial math as “mortality credits” — are factored into the calculations of the payouts from pooled general funds. However, annuity payouts are generally higher than many fixed-income payouts or many equity dividend payouts.
They also tend to have less income risk, as they won’t shrink in value when interest rates finally start to rise again.
Know Your Income Planning Options
Talk to your financial advisor about the income strategy they for their clients.
They may employ a family of mutual funds or use a professional money management platform. Or they may use individual stocks and bond ladders or some form of annuity.
You need to know exactly what risks you are taking with your money. That way you can be prepared when the next bear market hits or when interest rates start to rise.
Is an Annuity Right for You?
Fixed index annuities can be an ideal choice for those who need income from their assets. Although the rate of interest that they pay isn’t guaranteed, they have historically earned more interest than plain-vanilla fixed annuities over time.
An index annuity earns interest based on movements of an underlying financial benchmark. For example, many index annuities link to the Standard & Poor’s 500 Price Index.
When the index rises, the annuity will credit your money with interest accordingly. The interest will be based on a percentage of that growth.
But if the index drops in value, then the policyholder stays high and dry with no loss of principal due to index losses. This floor of protection guards both your principal and already-earned interest. What’s more, they are “locked in” when the next period for calculating interest arises.
Keep in mind that in exchange for that protection, insurance companies limit to an extent the growth potential of an index annuity. Ask your financial professional for more details about possible pros and cons of this financial choice.
Start Securing Your Financial Security Today
Creating reliable monthly income to meet your needs can be challenging in today’s market conditions.
Don’t hesitate to talk to your advisor about alternative options such as annuities. They can provide you with guaranteed lifetime income that you can’t outlive, even if you completely exhaust the value of your contract.
You can’t get this type of guarantee with any other type of vehicle, from stocks and bonds to mutual funds and managed money platforms.
Once they have been depleted, they are gone. Consult your financial professional about your options and whether annuities can help enhance your chances of enjoying a financially secure, worry-free retirement.
What if you are looking for help from a financial professional? Or if you want a second opinion of your current retirement strategy? Financial professionals can be found at SafeMoney.com with just a few clicks of your mouse.
Use our “Find a Financial Professional” section to connect with someone directly. Should you need a personal referral, call us at 877.476.9723.