RETIREMENT
After making Social Security estimates you can progress to retirement income software , which will help you project the levels of inflation-adjusted income clients will need to cover their living expenses and how they ’ ll draw that income from various sources , including :
• Full- or part-time work
• Pensions
• Savings and investments , including required minimum withdrawals ( RMDs )
• Life insurance
• Inheritances
• Annuities
A technology-enabled analysis can reveal income gaps or shortfalls depending on when clients plan to retire and when they plan to file for Social Security benefits — which is not necessarily the same age . The analysis can also uncover potential needs for an income boost late in life .
Bridging Income Gaps With Annuities
A Social Security-plus-retirement income analysis often sets unmarried clients on the course toward a single payment income annuity , typically with a cost-of-living ( COLA ) adjustment .
A married couple with modest savings should face the reality that a widowed spouse will receive only the higher Social Security payment ( a fact that takes many clients by surprise ). Retirement income software can project constant expected income levels achieved by clients when the following things happen :
• When the spouses retire at different ages ;
• When they fill in the income gaps with withdrawals from retirement accounts ;
• When they maintain a reserve for the step-down in the widowed spouse ’ s Social Security payments ; and
• When they buy a single-payment immediate annuity ( SPIA ).
The single-payment immediate annuity has two advantages : It has simple terms and low fees . Clients will need your help selecting COLA and survivor benefits . A spouse with compromised health will need to purchase an annuity with a certain period of payments .
Mass affluent households with $ 500,000 to $ 2 million in investment accounts may benefit from some combination of SPIAs and registered index-linked annuities ( RILAs ).
The SPIAs can be purchased from a traditional IRA , with the premiums and value of the annuity purchase primarily determined by the size of the IRA .
RILAs have two advantages : They offer greater flexibility in the timing of purchases and pattern of payouts , including payouts that depend on a combination of market indices .
RILAs , however , also have two disadvantages : They come with higher fees and higher taxes because they are funded by withdrawals from a brokerage account , and the annuity ’ s income and appreciation are taxed at ordinary rates .
High-net-worth households have more assets to use to create retirement income , but even they may benefit from one or more types of annuities :
• An investment-only variable annuity ( IOVA ) allows owners to defer taxes on highly taxed securities , especially alternative investments .
• A single-payment deferred annuity ( SPDA ), often called longevity insurance , can be purchased for each spouse in their traditional IRAs .
Payments on the SPDA could begin when the client is in late old age ( from age 80 to 85 ) to provide living expenses when the client cannot fully participate in their financial affairs .
The situations I ’ ve described explain in part the rise of platforms that investmentfocused , fee-based advisors can use to gain access to low-cost , no-commission annuities . The insurance industry , recognizing the opportunity in the retirement income crisis , has become more creative in its product development and support of traditional insurance producers .
Across the board , financial professionals are more keenly aware that they can gather more assets and inspire referrals when clients feel they have a plan and can exhale at the thought of retirement .
In some cases , that means turning to annuities .
PAUL R . SAMUELSON is the chief investment officer and co-founder of LifeYield .
52 | FINANCIAL ADVISOR MAGAZINE | MAY 2024 WWW . FA-MAG . COM