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Sailing Into Retirement

Insurance products are making a retirement-planning comeback, and may be the lifeboat your clients need in unsure financial waters.

By Lynn Vincent

Angela Stillwell’s client Bill had a problem: He’d lost $1 million.

He didn’t lose it all at once. Like others approaching retirement, Bill had, over the past three years, watched his retirement account values plummet as the ill winds of stormy equities markets battered his portfolio. He had wanted to retire in 2006, Bill told Stillwell, a CFP with AXA Advisors in Atlanta. Now, with his retirement plan in tatters, he was concerned he’d have to wait at least seven more years.

An executive in the financial arena, Bill had tracked his numbers very closely, Stillwell says. But he hadn’t considered insurance products as a way to caulk the cracks in his retirement plan when the market bear stomped onto Wall Street in 2000, and then decided to stick around. But Stillwell had. After a careful review of Bill’s post-career financial plan, she shored up his portfolio with a combination of permanent life insurance and annuity products. The result: He’ll be able to retire on time.

Insurance-minded financial advisors have long touted the essential role a variety of permanent life and annuity products play in retirement plans. Others (including do-it-yourselfers), however, jettisoned such instruments a decade ago in favor of the dubious philosophy “buy term and invest the difference.” But since sour equities markets began engulfing that difference like a baleen whale swallowing plankton, planners and investors alike are rethinking the importance of those products in sound retirement planning.

“Two or three years ago, we would market [insurance] to wirehouses and independent broker-dealers,” says Lynn Rosenburg Kidd, principal at Innovative Solutions Insurance Services, a life brokerage agency in Torrance, Calif. “Until then, trying to get them to think about life insurance was very challenging. But that’s really shifted in the last year or two.”

Americans nearing retirement—and losing money instead of accruing it—remain woefully uninformed about the fiscal realities of post-career living.

Educating the uninformed
This uptick in interest coincides with a downward slide in retirement assets. According to the Investment Company Institute (ICI) in Washington, D.C., by the end of 2002, U.S. retirement holdings had slipped 8 percent to $10.2 trillion, a decline caused almost entirely by equity fund losses. Meanwhile, Americans nearing retirement—and losing money instead of accruing it—remain woefully uninformed about the fiscal realities of post-career living.

MetLife Mature Market Institute commissioned a test-style survey of 1,201 Americans aged 56 to 65 who were within five years of retirement. Researchers asked participants to answer 15 questions on topics ranging from longevity and long-term care to retirement expenses and asset protection. Among the results:

  • The average participant got only five questions right.
  • Those who had not yet retired seriously underestimated what it would cost to live during retirement, and overestimated how much they could withdraw from retirement savings and still avoid running out of money.
  • Less than 25 percent knew that outliving their money is retirees’ greatest risk.

Educating clients is key to retirement-planning success, says Jim Davey, vice president and managing director of corporate retirement plans for Hartford in Simsbury, Conn. Davey says that’s why the company provides a no-gaps retirement education and advice program.

“We try to deliver all the media that an individual would need to learn about his retirement program,” Davey says. That includes a consultation with an advisor, benefit service centers and an educational and transactional Web-based program. “Because of the education programs, [retirement plan] participants … have better discipline over the long haul. They understand they’re investing for the long term, and we don’t see them changing their plan because of short-term market fluctuations.”

Hartford offers agencies and producers a new four-stage retirement-education workshop series called Plan for Life. The first workshop focuses on setting up a retirement plan and explains simple principles such as the magic of compound interest. Phase two targets clients at midcareer—when they’re ripe to shift mindsets from saver to investor—and explains more complex concepts such as asset allocation. The third stage of the program is preretirement; this is when the advisor presents material on risk tolerance, time horizons and options for closing any gaps that may have arisen in clients’ plans. In the final workshop, tailored to people entering retirement, the advisor discusses withdrawal plans, tax strategies and, perhaps what is most important, how not to outlive one’s money.

Running out of money is a problem that continues to challenge advisors and retirees as life spans lengthen.

Adding longevity to the mix
Running out of money is a problem that continues to challenge advisors and retirees as life spans lengthen. Census data from 2000 shows that the number of people 65 and older will grow 21 percent in the next 10 years. By 2030, one in five Americans will be 65 or older.

Meanwhile, a healthy 65-year-old has a 50 percent chance of living beyond his annuity-table life expectancy of age 85. Still, says Cory Multer, New York Life vice president, “Way too many advisors are planning only through life expectancy” instead of addressing the possibility that clients could live into their 90s and beyond.

Experts say ever-growing life spans make annuity products a bedrock component of a sound retirement plan. But in the hierarchy of retirement-planning instruments, annuities are perennial cellar-dwellers. Over the past 13 years, the gap has widened between retirement assets held in annuities and those in all other categories except federal defined-benefit programs, according to ICI. In the early 1990s, investors poured about two dollars into annuities for every three dollars invested in defined-contribution plans. But by the late 1990s, they were pouring twice as much into defined-contribution plans as they were into annuities. Even after the market correction in 2000, annuities didn’t recover market share.

When reviewing your client’s plans for retirement, keep the following in mind:

  • Education is key. Most Americans remain uninformed about how much money they will need once they retire.
  • Plan for a longer future. Life spans are increasing, and many clients have a good chance of living past annuity-table life expectancies.
  • Check into new products. There are new annuity products on the market that address a host of client needs.
  • Don’t let the word variable scare you. Variable annuities and variable life may be an attractive option for certain clients.
  • Review and revisit. Nothing takes the place of sitting down with clients to review their portfolios and listen to their wants and needs.

Annuities with a twist
Multer believes advisors may be underemphasizing annuities, in part due to product features that have traditionally made them a tough sell. But in August, New York Life released LifeStages Lifetime Income Annuity, a product designed to address a number of concerns that Multer says were a turnoff for consumers planning for retirement.

A main turnoff: The investor hands over a huge chunk of his or her life savings—often $100,000 or more—and can’t ever get it back. Many companies have added limited liquidity features in annuities, such as certainty-period withdrawals. But Multer says that when a client puts cash into an immediate annuity, it’s money he doesn’t think he’ll need. However, if a need does arise, say seven years into a 10-year guarantee, there’s not much money left.

“Just when you need the money,” says Multer, “there’s not a lot there.”

New York Life’s solution is to tie liquidity to the client’s life expectancy at issue, and offer a one-time cash-withdrawal option at the 5th, 10th and 15th year after the annuity is issued. There is also a backup plan: If a client faces a significant nonmedical loss (an earthquake destroys his house, for example), he may take the one-time cash withdrawal. To further overcome retirees’ liquidity concerns, the LifeStages annuity also features a no-questions-asked accelerated payment option. The feature allows the annuity-holder to request a lump-sum withdrawal of the next six payments—for any purpose—then receive no payments until the policy is caught up. This payment option is so unique, says Multer, that New York Life has requested a patent.

Amid increasing consumer demand for retirement guarantees, other advisors are channeling clients toward annuities.

Staying on track
Amid increasing consumer demand for retirement guarantees, other advisors also are channeling clients toward annuities. Remember Angela Stillwell and her client Bill? Though his nest egg had shrunk, creating in practical terms a smaller pool of cash to spread over his life span, Stillwell was able to use life insurance and an annuity to help Bill retire as planned.

She suggested he could take his maximum monthly pension withdrawal of 100 percent if he used life insurance to protect his spouse. Normally, retirees elect a lesser withdrawal amount, say 50 percent, so their spouse continues to draw on the pension if the retiree is the first to die. But with a pension-equivalent life insurance policy in place, Bill could withdraw twice as much money each month during retirement, and still ensure that his wife would be taken care of.

Stillwell also suggested that Bill put some of his accumulated assets in an insured variable annuity. The product she suggested allows him to pull out up to 15 percent of his initial contribution annually. Meanwhile, the annuity would pay a guaranteed return rate of 6 percent for 10 years. “That means his money is accruing at 6 percent even if the account value is showing it’s going down,” Stillwell says. “At 10 years, he could annuitize, which would be good in a down market. Or in a bull market, he could let it ride. He gets the greater of the two values.”

The “V” word
Ron Sellers, an insurance agent based in Palm Beach Gardens, Fla., recently used variable annuities to help a corporate client create attractive retirement plans for two of its key employees. With salaries of $90,000 each, the employees, women between 50 and 54 years old, already were highly compensated. But the boss wanted to create a retirement package so attractive they wouldn’t be lured away by another firm. So in addition to an annual 4 percent contribution to the company’s standard 401(k) plan, Sellers helped him add a company-funded variable annuity to each woman’s retirement plan. Initial funding was $9,000. Then the company would add 10 percent of each woman’s salary to the policies each January.

Sellers also recently teamed with a wealthy South Florida couple who had already retired. He reviewed the couple’s asset allocations, listened to their preferences and made some suggestions. In the end, the couple decided to downsize their home from a $4 million showplace to a $1 million, well, showplace. Then Sellers helped them invest most of the cash proceeds in a variable annuity portfolio structured for both income and growth potential.

Both Stillwell and Sellers beefed up their clients’ retirement plans with products that included the “V word”—variable. While many equities-shy advisors have stopped selling variable products altogether, others say there’s still a place in retirement planning for equities-linked products, even variable life.

Mutual fund statistics show investors may now be less shy about equities-based products. While the bottom fell out of equities-based mutual funds between 2000 and 2002, statistics hint at a rebound. The combined assets of the nation’s mutual funds had by June 2003 increased by about $114.4 billion, or 1.7 percent, ICI reported. That increase included a $360 million hike in stock fund assets since December 2002. Meanwhile, stock and domestic-equity funds saw markedly higher inflows from May 2003 to June 2003.

“There’s a huge market for variable life if it’s sold correctly,” says Lynn Rosenburg Kidd. “Even though we’ve had horrible markets, VL still works very well if the client can put large amounts of money away.”

Example: A business owner in her 30s is maxing out her 401(k) contributions, but still not accruing enough cash to fund her retirement. She could diversify into stocks or real estate, but the capital gains and tax implications are less than attractive. Solution: a VL policy with a face value low enough to let the client over-fund. There’s no tax deduction, but as Kidd points out, the money grows tax deferred. Then, when she’s ready to withdraw, she can do so and pay taxes (bad idea), or borrow against the principal and instead pay a minimal amount of loan interest (better idea.)

Kidd believes the enduring bear market has unmasked VL for what it really is: a tax-deferred investment first, life insurance second. “Some people would disagree with me,” she says, “But I can’t wait for their clients to start getting statements where they’re losing money every year, until all of a sudden the premium isn’t sufficient to keep the policy in force.”

So what’s the bottom line on retirement planning? Client education? Portfolio review? Beefing up plans with products bearing guarantees? While the answer may be all of the above, Hartford’s Jim Davey adds this: “Stay visible to your clients. Continue to reinforce what they already know to help them stick with the plan you’ve put in place.”

Lynn Vincent is a frequent contributor to Advisor Today.


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