Wealth Management

Guaranteed Income for Life

Unlike other stages of life that have a defined beginning and end, the retirement stage has only a defined beginning. The end of the retirement stage is dependent upon the occurrence of death. Death can occur at any age. Consider the generic "Life Template" shown above. Assume retirement begins at the age of 65 (the U.S. average retirement age for a male). Then, assume death occurs at the age of 73 (the U.S. average life expectancy for a male). Correspondingly, the average retirement stage duration is 8 years. However, death could also occur at the age of 100. Correspondingly, the retirement stage duration could be 35 years. How can a retiree plan necessary income for a retirement that could last from an average of 8 years to potentially 35 years?

As discussed, an FIA used in Retirement Income Management provides peace of mind that retirement can begin when planned. Likewise, an FIA used in Retirement Income Management provides peace of mind that retirement can end whenever, regardless of how long that might be. The reason for this is that an FIA is a binding contract between a retiree and an insurance company. In exchange for a sum of money provided by the retiree, the insurance company guarantees the retiree regular income payments for life. Consequently, it is the insurance company that takes the risk for a life that lasts longer than expected. The retiree does not have to worry about it!

Other Advantages

During the growth period (the period prior to annuitization), an FIA has some additional features. Firstly, the FIA provides a death benefit, whereby an elected beneficiary can receive the proceeds from the FIA. This protects the retiree should he or she die before annuitizing. Secondly, the FIA allows limited withdrawals to provide income payments without the need for annuitization. Lastly, in some cases, the FIA offers financial incentives to continue in the growth period and forego annuitization altogether. This is a Lifetime Income provision.

Alternate Approach

There is an alternate approach to Retirement Income Management that transitions only a portion of retirement savings into safer investments in preparation for retirement income. The remaining portion continues to participate in higher risk investments by means of Wealth Management. The actual amount transitioned into safer investments for Retirement Income Management depends upon a number of individual factors. However, the amount should be sufficient to provide at least the minimal income a retiree would need to live on, when combined with other income sources not provided by Wealth Management. In some situations, this amount may include all of the retirement savings. Consequently, this alternate Retirement Income Management approach may not be possible for some retirees.

Hedge Protection

Implementing the above alternate approach provides a retirement Hedge (financial safeguard) for continued participation in the Wealth Management higher risk investments (with higher potential returns). In each retirement year, a retiree decides whether to take income payments from Retirement Income Management funds or Wealth Management funds (or a combination of both). During a year of a downturned market, all or most of the income payments should be taken from Retirement Income Management funds. During a year of an upturned market, all or most of the income payments should be taken from Wealth Management funds. The reason for this annual decision is that taking income payments from Wealth Management funds during a downturned market solidifies a market loss, and should be avoided.

Indexed Universal Life

In our previous example, Retirement Income Management used the FIA to provide Hedge protection. In this case, the income payments taken from Retirement Income Management funds would be FIA withdrawals. However, Retirement Income Management could also use a special type of life insurance called Indexed Universal Life (IUL) instead of, or in addition to, the FIA. When an IUL is used, the income payments taken from Retirement Income Management funds would be IUL loans against an accumulated policy cash value. These loans can be taken during retirement and never paid back (the total amount associated with the loans is deducted from the life insurance death benefit upon the death of the retiree).

Whether by FIA and/or IUL, providing Hedge protection for continued higher risk Wealth Management investments during retirement allows for a combination of the best of both investment worlds. Determining which Hedge protection to use (FIA, IUL, or both) depends upon a number of individual factors. However, in certain situations, the IRS allows a retiree to take essentially Tax-free* income payments from an IUL (of both premium payments and interest earnings) using the policy loan provision! Consequently, for this reason, the IUL has an advantage over the FIA (and practically all other retirement investments).

* Check with your tax advisor to confirm applicability of this tax advantage to your specific situation.