Now that Baby Boomers are getting older, those in defined contribution plans such as (401 (k) and 403 (b), are finding that they aren’t sufficient to provide income for the duration of the retiree’s life. Although 403 (b) plan annuities are better, the problem still may exist.
Although plan sponsors have focused on the need to save for retirement, but have been lax in preparing Baby Boomers to address needs after retirement commences. Plan sponsors are not required to provide post retirement help, however, when they do, they face fiduciary responsibility.
Some of the risks Baby Boomers risk in retirement are:
Because they are living longer, retirement savings need to last until end of life. From 2000 – 2014, the life expectancy of a 65 year old has increase by 3 years. There is a great probability that at least one spouse will live to be 95 or more.
There are market challenges that could affect their retirement income. If a serious downturn were to occur, either right before or after retirement, the retiree may be forced to use up investment income to pay expenses and has less of a chance to recoup.
They may not be sure of how much they can withdraw in order to make sure they have enough left for life. Many experts recommend that a 65 year old retiree withdraw no more than 4 % per year (adjusted for inflation) in order to have a 90% chance of their money lasting for 30 years.
Their mental state may decline as they get older. A person 85 or older is often not capable of making smart financial decisions on their own.
Traditional annuities have a fixed monthly payment that is guaranteed for the life of the retiree and spouse. With an annuity, the retiree pays some or all of his account balance to the insurance company and they in turn pay the retiree for life. There are no market fluctuations and they know how much they will take in each month and for how long.
Kevin Thompson, CPA says “annuities are always under fire and cast asunder by many. I believe they can serve to fill the financial gap created by longer lives.” Thompson went on to say “recently we discovered that a client thought he had retired with income for life. He did, but only his life. If his wife outlives him, and there is a very high likelihood of that, she would not receive his retirement income. We worked with a reputable insurance company to provide an annuity that would kick in and continue the income for her life. Needless to say, she slept better with that sense of relief not having to worry about retirement income.”
GWB’s (Guaranteed withdrawal benefits) also guarantee income for life under certain conditions. The retiree invests all or part of his account in a managed fund. (Usually a target date or balanced fund) The GWB has two parts. An Equity factor in which the account grows with contributions and investment gains, and the protection factor. As long as the retiree’s withdrawals do not exceed a certain percentage of the highest account balance, the insurance company pays at the same rate if the investments are consumed. The retiree may take larger withdrawals from investments to pay expenses if needed, although this reduces later payments.
Thompson says “I am not smart enough to understand the ministrations and fine print of these types of contracts. I just know that more often than not, what people think they have is not what they have. And the sooner they figure that out, the better. With time we can fix so much.”
Sometimes the fiduciary concerns of considering the retiree’s needs and recommending products to meet those needs are overwhelming. Because of this the Department of Labor has created a regulatory safe harbor.
The regulation stipulates that a fiduciary must be able to conclude that at the time the selection of the product is made, the insurance company is capable of making all future payments. Thompson says “in 2008 when the world was collapsing about us, most of the insurance companies (except AIG) stood strong, met their obligations and provided reserves for future needs.” The public believes this requires monitoring. The movie Too big to fail memorialized just how true that is.
Cost of the product is also considered but mostly the financial integrity of the provider. “Cost should always be one of the elements of the decision. But the financial stability of the underlying insurance company should be the number one reason to write the policy.”
Taking into consideration the risks that Baby Boomers face and the need for in-plan solutions, fiduciaries must consider offering products that are guaranteed lifetime income and do so in an informed manner. Kevin Thompson, CPA in concert with his professional affiliates can work with you to provide sufficient income now and into the future. Please contact him for a complimentary retirement review.
firstname.lastname@example.org or call him @ (310) 450-4625.