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Income-Planning Strategies

VAs help clients prepare for retirement and overcome income-planning obstacles.

By Harry N. Stout

As preretirees, especially Baby Boomers, shift from the accumulation phase of their retirement planning to distribution, they will need assistance in creating a comprehensive income plan that addresses four significant obstacles: excessive withdrawal risk, asset-allocation risk, inflation risk and longevity risk. Financial advisors must help them understand and prepare for these risks so they can protect their retirement and live their desired retirement lifestyles.

But with the income-threatening challenges facing preretirees, what unique income-protection options can you offer? Increasingly, variable annuities (VAs) seem to be an answer. They consist of four key components to help your clients prepare for retirement and give them tools to overcome income-planning obstacles. The components are investment options, guaranteed benefits, tax advantages and income options.

A tool for many seasons
VAs typically offer a full range of professionally managed portfolios providing access to a broad spectrum of investment options. Investors can take advantage of equity investing through a variety of investment options or subaccounts. Within the annuity, these subaccounts present diverse risk and return objectives, ranging from relatively conservative to aggressive. The value of the annuity fluctuates with the market performance of the subaccounts, and that fluctuation can cause gain or loss of principal.

The second component is guaranteed benefits. These provide built-in protections that allow investors to transfer some risks to the insurance company. VAs are distinctive because they may offer protection from loss of value or income (known as living benefits), and they often offer death benefits (taxable) to help protect your clients’ contract values for beneficiaries.


Third, VAs allow earnings to grow tax-free until they are withdrawn. Dividends, interest and capital gains accumulate tax-deferred. Instead of paying taxes each year on investment gains, compounded tax-deferred growth may help investments grow faster than taxable investments earning the same rate of return. (Obviously, tax deferral is already available in IRAs and other qualified plans; however, additional features within VAs may make them a viable alternative.)

Finally, and perhaps what is most important for those seeking guaranteed retirement income, are the various income options available through annuities. Your clients should have several income options to choose from: payouts for a lifetime, payouts for a specified number of years, or for some, a combination of the two. By choosing a lifetime payout, it is possible your client will receive a guaranteed income stream he will never outlive, lessening longevity risk.

Using VAs
So, have you incorporated VAs into your mix of comprehensive income-planning options?

Some advisors continue to disregard VAs for many reasons, ranging from confusion over fee schedules to perceived product complexity to the rigors of compliance or regulatory standards. But you will need to understand all the choices available, including income options and guarantees, such as a guaranteed minimum income benefit.

Getting started
Here are five steps to help you start.

Step 1: Overcome complexity-anxiety with VA education. Specialized topics like integrating VAs into income-planning strategies often make advisors feel reluctant to use them. Many worry about not having all of the answers to their clients’ questions or fear jeopardizing the client-advisor relationship with a new approach.

Start by reviewing the annuity prospectus and encourage your clients to do the same. Then work with your annuity wholesaler who can provide you with additional information and answers to your questions. Also, continuing-education workshops, web-based self-study programs and other training opportunities offer additional information.

Step 2: Talk to your clients about income planning that assesses projected retirement expenses and income sources. In 2003, Forrester Research Group sponsored a study that showed that investors who view their financial advisors as “customer advocates” reported the highest level of satisfaction. Integrating an income-planning conversation into your preretiree clients’ annual portfolio reviews can speak volumes about your concern for planning and protecting retirement income that will last throughout all stages of retirement.

Start the conversation by determining or reevaluating the income your clients will need during retirement. Using a worksheet to calculate monthly and yearly expenses, determine the projected amount of income they will need for expenses like housing, food, transportation, health and personal care. Also, have them estimate discretionary expenses such as entertainment, travel, family care, education, taxes and charitable contributions.

Next, assess and inventory income sources by first listing predictable sources and amounts of retirement income. These may include Social Security, pensions and other long-term retirement income resources. Then list income from investments and assets like CDs, stocks, bonds and employer-sponsored plans.

Step 3: Identify expense/income gaps and explore options for filling them. Using the inventory of expenses and income sources, determine the amount of income needed to cover monthly expenses throughout retirement, considering factors such as withdrawal rates and inflation estimates. Identify expense/income disparities. How much additional income do your clients need? VAs may offer one way to fill some of these income gaps.

Remember that it is important to evaluate how an annuity may fit into your client’s investment portfolio, taking into consideration both his current and future financial positions, before making a recommendation.

Step 4: Create a proper asset-allocation strategy. If a VA is appropriate for your clients, determine a sound asset-allocation strategy relevant to his needs for portfolio growth or preservation. Help him choose from the investment choices in a VA and explain the advantages and disadvantages of adding income benefits to his VA contracts. Continue to monitor this asset-allocation plan as your preretiree client nears retirement age so that his portfolio can be adjusted as his investment objectives change.

Step 5: Revisit your clients’ comprehensive retirement-income plans at least annually. The annual portfolio review is an ideal time to reevaluate your clients’ comprehensive retirement-income plans. At a minimum, your clients will need yearly expense reviews, asset-allocation appraisals and withdrawal or drawdown rate assessments. Ask them for information about changes in their personal circumstances, such as changes in health status, insurance premium costs, etc. Educate them to alert you about changes so you can adjust retirement-income plans to address their changing needs.

Harry N. Stout is president of ING’s annuity business group, a unit of the ING U.S. Financial Services. Contact him at

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