NOT YOUR FATHER'S
RETIREMENT (UNFORTUNATELY)
Pat McCormick
BISM Winter Issue 2010

Pat McCormick is Senior Vice President, Sales and Distribution, Symetra Life Insurance Company. For more information, visit Symetra Life Insurance Company.
 

 

FOR DECADES, American workers have been diligently feathering their retirement nests, feeling secure in the knowledge that if they hit their savings targets they could be reasonably certain of a secure retirement. That was the good old days.

The harsh reality is the "golden age" of retirement enjoyed by our parents and grandparents—made possible by lifetime employer pensions, generous government benefits, medical insurance that actually covered the cost of care, and double-digit investment gains—is rapidly becoming a fading dream for many boomers and Gen-Xers. But for the one in four 55-and-older workers who currently have $250,000 or more saved,¹ income protection strategies may help meet the new crop of retirement risks head on.

Risk 1: Longer Retirements

Due to the economic downturn, about two-thirds of American workers say they will delay retirement by at least one year, with 27 percent expecting to work at least five years longer than planned.² But despite the economy (or perhaps because of it), the average retirement age continues to hover at 62. In fact, new Social Security applications surged an unexpected 20 percent last year.³ According to the Social Security Administration's own mortality tables, on average these recipients can expect to live 20 years after collecting their first check.⁴

Income Strategy: Longevity Insurance
One of the least expensive ways to get guaranteed income for life is with "longevity insurance."⁵ These deferred income annuities are typically purchased decades in advance (for example, purchased at 65 for $50,000),⁶ and begin paying out long after retirement begins (for example, $3,100 per month at age 85). By allocating just a small portion of the portfolio to back-end income protection, typically 10 percent to 15 percent, purchasers can spend more freely early in retirement knowing a fresh source of guaranteed lifetime income is waiting. This eliminates the guesswork from income planning, because there's no need to hold back a huge portion of assets just in case clients live beyond their life expectancy.

Risk 2: Earlier-Than-Planned Retirements

A 2009 study found that half of older workers are forced into retirement earlier than planned. Nine in 10 cite "negative" reasons for their early departures, foremost being health issues (42 percent), followed by downsizing or other job issues (34 percent), and caring for a family member (18 percent).⁷ For many older workers, an early exit can mean making decisions that jeopardize future financial security. Income Strategy: Restart the Social Security Clock

Income Strategy: Restart the Social Security Clock
Because most newly minted retirees trigger their Social Security benefits before reaching full retirement age, they "permanently" reduce their benefits by as much as 30 percent. With the Social Security Administration's SSA-521 form, however, they can halt current benefits, pay back what they've collected interest-free and restart benefits at a new, higher rate based on their current age. So, a 62-year-old who started out with a monthly benefit of $1,297 would pay back about $130,000 at 70, giving him a 200 percent increase to $3,078 and a 100 percent survivor benefit for his wife. As terrific as immediate annuities are, to match the $1,500 per month increase and other benefits cost him about twice as much: $265,000.⁸
You can help clients plan ahead by suggesting they stash their "repayment" money in a fixed deferred annuity. Even in today's low-interest-rate environment, $105,000 with a seven-year rate lock and earning an effective interest rate of 3.22 percent would guarantee a 62-year-old a little over $135,000 by age 70.

Risk 3: Rising Medical Costs

Even with Medicare and supplemental health care insurance, nearly 100 percent of seniors 65 and older incur out-of-pocket medical expenses. These costs consume about 12 percent of their household income on average, and continue to climb with inflation and age.⁹

Income Strategy: Split the Ticket
If seniors want to make sure their supplemental or long term care insurance (LTC) premiums are covered, an immediate annuity may be able to help. If a 62-year-old man had an LTC policy with annual premiums of $709¹⁰, a purchase payment of about $14,100 could potentially cover those premiums and provide 3 percent annual increases to help manage rising costs.
For the less predictable out-of-pocket expenses, retirees might set aside money in a fixed deferred annuity where it can grow tax-deferred until needed.¹¹ Annuities typically offer no-cost access options during the surrender charge period, like 10 percent free annual withdrawals and full access for hospitalization or nursing home confinement.

Here's one final thought: Retirees are far more likely to get the desired results if they align the right product to the right need. Immediate annuities work best when used for the purpose they were intended: income protection. Riders that guarantee the return of the premium payment in the event of early death come at a price, and that price is future income. Clients who want to transfer wealth may want to add single premium life insurance to their portfolio, for example. This product is far more effective for transferring wealth, immediately turning an eligible applicant's one-time premium payment into a larger, guaranteed, tax-free death benefit for loved ones.

The bottom line is that annuities can free clients to spend and invest their other retirement assets more aggressively, because they’ll never have to worry that market losses or an exceptionally long life could unravel their plans.

¹ "How Much Have American Workers Saved for Retirement," EBRI Fast Facts #119, April 16, 2009.
² Janet Morrissey, "Survey: Many Americans Now Plan to Work Past 67," Time, Thursday, Oct. 22, 2009.
³ Emily Brandon, "Record Numbers Claimed Social Security in 2009," U.S. News & World Report, Jan. 22, 2010.
⁴ "Period Life Table, 2005," Social Security Online, Actuarial Publications: socialsecurity.gov/OACT/STATS/table4c6.html
⁵ Longevity insurance is a concept, not the name of a product. Some states define longevity insurance as an annuity with payout option only, with no death benefit.
⁶ Quote is for a 65-year-old man, life only and with no death benefit.
⁷ Ruth Helman, Mathew Greenwald & Associates; Craig Copeland and Jack VanDerhei, "The 2009 Retirement Confidence Survey: Economy Drives Confidence to Record Lows; Many Looking to Work Longer," EBRI Issue Brief, No. 328, April 2009.
⁸ Assumes starting monthly income of $3,078 with annual increases of 2.5 percent, and calculated based on a joint life immediate annuity with 100 percent survivor benefit for a 70-year-old man and 67-year-old woman.
⁹ Richard W. Johnson and and Corina Mommaerts, "Are Health Care Costs a Burden for Older Americans?"Urban Institute, The Retirement Policy Program, No. 26, July 2009.
¹⁰ "Long Term Care Insurance Rates: 2009 Long-Term Care Insurance Price Index," American Association of Long Term Care Insurance, downloaded January 2010: www.aaltci.org/long-term-care-insurance/learning-center/rates.php
¹¹ Withdrawals may be subject to ordinary income tax and a 10% penalty may also apply to amounts withdrawn prior to age 59 1/2.