INCOME TODAY, INCOME TOMORROW
Michael H. Korthaus

Mike Korthaus is Vice President, Financial Institution Sales, Protective Life Insurance Company (Birmingham, AL). He can be reached at (513) 362-1553 or via email at mikekorthaus@protective.com.
 
 

FOR MANY OF US, retirement is like a race. We spend 20, 30, or even 40 years accumulating as much cash as we can in our retirement accounts and-when the race is over-rely on that cash to last us throughout our lifetime.

Cash, combined with income-producing fixed investments, has been the foundation for many retirees' income needs. However, what some of your clients may not understand is that producing cash flow (a steady stream of predictable income) is not the same as drawing down cash. And in the face of recent market turmoil, many account values have diminished. This may have made your clients vulnerable when it comes to covering their basic living expenses.

One source of income that has not diminished-and in fact has gone up-is your clients' Social Security benefit. Talk to your retired clients and ask them if they like going to the mailbox each month to get their Social Security check. Better yet, ask them if they look forward to the first check of the year to see how much it has increased.

The consistent, guaranteed income stream and potential annual cost-of-living increases that Social Security can provide give your clients peace of mind. No other financial instrument can offer that kind of comfort. Except one. And you can offer it every day-it's a single premium immediate annuity (SPIA).

SPIAs are good alternatives for clients who want:

• A guaranteed stream of payments that he or she cannot outlive
• Payment increases that can occur each year
• Optional medical evaluation that could provide increased payouts for certain health conditions
• Enhanced survivorship options, including payments that aren't reduced when the first spouse dies
• Guarantees from the issuing insurance company

A delicate balance

SPIAs can be very efficient and may produce a higher level of guaranteed cash flow than other investment alternatives. Logic might dictate that your clients' retirement income should come exclusively from SPIAs; however, we know better. Prudent concerns about diversification and liquidity lead us to other solutions.

So, what's the right balance? That will vary greatly from client to client. A rule of thumb says that your clients will need assets equal to about 25 times their desired annual cash flow. So, if they're looking for $4,000 of annual lifetime income from their portfolio, they will need an asset pool of about $100,000 when they begin taking withdrawals.

A rule of thumb says that your clients will need assets equal to about 25 times their desired annual cash flow

In this example, if your clients have significantly more than $100,000 set aside for cash flow, they might consider keeping a larger proportion in other investments. However, if their assets fall short of that level, they might prefer to direct a higher percentage of funds to an immediate annuity purchase to optimize their cash flow.

Next steps

Immediate annuities can be a powerful solution, particularly when combined with the other tools that are available to help your clients manage long-term planning objectives. Consider teaming up with an insurance carrier that has a wide array of tools to help you engage your clients in finding retirement solutions-including life and annuity products, client seminars and brochures, needs analysis tools, and financial calculators. With the right tools, planning, and collaboration, you can help add tremendous value and security to your clients' retirement years by providing them income today-and income tomorrow.