Managing Longevity Risk for Your Clients
Managing your client’s longevity risk is one size that fits all. The insurance industry is uniquely situated to manage these problems. While your clients may want to wait until their qualified accounts grow a little more, they want to save some more money, or they just aren’t ready, you need to create a sense of urgency for them to take longevity risk off the table as soon as possible.
Managing Longevity Risk for Your Clients By Curtis Cloke, CLTC, LUTCF, RICP
Addressing longevity risk is critical because increasing longevity increases the likelihood that other risks will derail your client’s retirement plan.
"One-size fits all" is not a sentence that is typically muttered when talking about a financial strategy with clients. With the Department of Labor ruling looming over our industry, talking heads are trying to find a solution that can work for all Americans in the retirement-planning space.
But as most financial advisors understand, there is never a one-size-fits-all solution. However, there are risks that all Americans face, no matter their situation. Whether someone has $100 million or $1 million in retirement assets, everyone will encounter longevity risk at some point in their retirement planning.
In the past, you may have read articles about bullet-proofwithdrawal rates and investment strategies that run until the age of 90. But will they work in perpetuity?
Longevity risk is far and away the most important risk to manage. The vast majority of Americans don’t think they will live long enough for this type of risk to affect them, but they need to wake up out of their distribution daze. Longevity risk supersedes all other types of risk; in fact, it is not just a risk. It magnifies other types of risk like order-of- returns risk, market risk and long-term-care risk. Increasing longevity increases the likelihood that the other risks will completely derail your client’s retirement plan.
For the 78 million Baby Boomers who are retiring at a rate of 10,000 a day, there may not be one strategy that solves all of their retirement challenges, but understanding risk is the most important place to start.
Even the U.S. government realized the need when it created the Social Security System in 1929 (signed into law in 1935). It realized the importance of setting up a guaranteed income stream to last an individual’s entire life. This is where advisors should begin when trying to alleviate longevity risk.
The sentiment in the past two years is that since some strategies and loopholes have been closed, Social Security is no longer important. I will argue that it’s more important than ever to get the most out of your clients’ Social Security benefits. Once you have determined the best strategy for your clients’ Social Security benefits, it’s time to look at other income options that can lessen longevity risk.
After your clients have reviewed their Social Security benefits, they need to start looking at annuitization strategies. There are many annuity strategies that can help to take longevity risk off the table, but keep in mind that every client has different income needs. So, it is important to work with the individual client to identify the specific income needs that should be covered.
Deferred Immediate Annuities (DIA), in concert with Single Premium Immediate Income Annuities and traditional investments, can be great tools to ladder increasing income, working alongside a Qualified Longevity Annuity Contract (QLAC) for the client’s later years. While these products may be unfamiliar to some advisors, they are products all financial advisors should understand if they want to manage longevity risk for their clients.
Regardless of how the DOL regulation plays out, managing your client’s longevity risk is one size that fits all. The insurance industry is uniquely situated to manage these problems. While your clients may want to wait until their qualified accounts grow a little more, they want to save some more money, or they just aren’t ready, you need to create a sense of urgency for them to take longevity risk off the table as soon as possible.
Once that is taken care of, your clients will be free to focus on his assets’ long-term growth and liquidity, while finding more reasons to enjoy life and pursue their passions.
Curtis Cloke, CLTC, LUTCF, RICP, is a Financial Planner and Retirement Professional from Burlington, IA. A MDRT and Top of the Table qualifier, Cloke has over 25 years of experience as an advisor, trainer, software guru and income distribution planning expert.
This article appeared in Advisor Today.