The Bay of Fundy, nestled between Canada's Nova Scotia and New Brunswick provinces, has the greatest tidal range in the world. The difference between high tide and low tide is a record 55.8 feet, according to the Guinness Book of World Records.
The shifting tides have a visually dramatic impact on the landscape. The same force that floats boats twice a day leaves them low and dry just six hours later. Anyone plying the shoreline needs to plan for and pay attention to this nearly unprecedented force of nature. Farther down the coast lies America, where a tide of another sort is having an equally significant impact on the financial landscape. America's population is steadily growing older as 10,000 baby boomers turn age 65 every day, creating a record tide of retirees with new and different financial needs.
Financial advisors have a beach-front perspective on this phenomenon, prompting many to refocus their practices from traditional wealth accumulation to income generation. It requires new thinking, new habits and new ideas to meet the challenge of helping Americans transform savings built up over decades to income that will last decades more.
Today's 65-year-old can expect to live another 18.5 years on average, according to the National Center for Health Statistics. Many people will even live well beyond their mid-80s and into their 90s. In fact, the U.S. Census Bureau predicts the population of people age 90 and older will quadruple in 40 years. Already, there are three times as many 90-somethings today than there were three decades ago.
The demographic wave calls for new asset accumulation and distribution strategies to ensure that while more Americans flirt with the century mark, their savings and retirement income will keep pace. There is a broad range of solutions to this problem but one thing they all have in common is they start with an in-depth review by a financial advisor.
The starting point is not necessarily the beginning but closer to the end. Any serious review of retirement income options should start with a "gap analysis" to determine what kind of lifestyle the client envisions in retirement, what expenses that lifestyle is likely to entail, how much income he or she will need to cover those expenses, and what income sources are available in retirement. Helping clients sort out these issues can ultimately enable them to make sound decisions about whether or not they are ready to retire, if not then when, what kind of lifestyle they can afford, and what they can do to protect their lifestyle as they age.
Once the financial imperatives are sorted, the advisor can then begin creating an income portfolio from various sources, including pension income if available, Social Security, dividends from investments, and savings and investments from retirement plans, IRAs and other sources that can be repositioned to create income. Increasingly, income strategies are starting with employer-sponsored retirement plans, particularly in the 401(k) marketplace.
The past few years have seen a flurry of new retirement income products introduced to the market, many of which are annuities available as alternative investment options. Participants can direct a portion of their contributions, earnings or both to these new options.
The most effective solutions provide retirement plan participants with a guaranteed income in retirement that will last as long as they do. This is critical for many people, especially those who will be unable to count on income from a defined benefit plan.
Like the force of the tide in the Bay of Fundy, the prospect of having a guaranteed income in retirement has a strong pull for many Americans. A study conducted by The Hartford in April 2012 found that 64% of employed Americans did not have access to a guaranteed income option through their employer's retirement savings plan or were unsure if they had access. Of those respondents, 87% said they would find it "very" or "somewhat" appealing to be able to turn at least a portion of their retirement savings into guaranteed income.
Despite what the research shows, the "take rate" for income options with retirement plans has been somewhat lackluster. One reason may be complexity, particularly annuity income options in the form of living benefits, such as guaranteed minimum withdrawal benefits (GMWBs). Some of the most recent products on the market have taken a different tack, though, focusing on simplicity to make income benefits easier to understand.
The simplest products allow participants to create their own pension-like income based on their actual needs in retirement. Participants can purchase units or shares of monthly income that is guaranteed to last for as long as he or she lives. The higher the income need, the more shares they can buy.
The cost of each unit is based on the age of the participant at the time of purchase, current interest rates, and the assumption that he or she will retire at age 65. The actual amount of income can rise or fall if the participant retires later or earlier, respectively.
Tides the world over run in six- or 12-hour cycles, much like the weekly, bi-weekly or monthly pay periods for most Americans. Many income options within retirement plans allow participants to take advantage of these cycles by purchasing shares of guaranteed income on a regular basis through payroll deduction. It's the equivalent of dollar-cost- averaging into income options. The actual cost of the shares varies over time based on prevailing interest rates and the participant's age at time of purchase. These plans also allow the purchase of income shares from exchanges from other income options or in a lump-sum.
The ancestors of Canada's Mi'kmaq First Nation tribe told folktales about the Bay of Fundy's great tides being caused by the splashing of a giant whale. Whether the tides are the effect of a whale tale or the combined gravitational forces of the earth, moon and sun, there is no doubt about the impact the tide has on those who live near it.
America's age wave will rival the Bay of Fundy's tides for its impact on the landscape, in this case the financial planning landscape. Advisors who get in front of this tide with a solid income perspective can make a big difference in their clients' lives and, ultimately, their own financial practices.
E. Thomas Foster JR., Esq., is The Hartford's national spokesperson for qualified retirement plans. Foster works directly with broker-dealer firms and advisers to help them build their qualified retirement plan business and educate them about industry issues. This material is not intended to provide tax, accounting or legal advice. As with all matters of a tax or legal nature, you should consult your own tax or legal counsel for advice. "The Hartford" is The Hartford Financial Services Group, Inc. and its subsidiaries, including Hartford Life Insurance Co., Hartford Retirement Services, LLC ("HRS"), and Hartford Securities Distribution Company, Inc. ("HSD"). HSD (member FINRA and SIPC) is a registered broker-dealer affiliate of The Hartford.
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