Meeting clients’ needs for security and growth

Many baby boomers are approaching retirement with fresh memories of the 2008 financial crisis. That experience, understandably, has caused some to focus on insulating their retirement savings against sudden market declines. But the concern that many of those same individuals should be having is whether their money will last through retirement.

As a financial professional, your job is to help clients manage these challenges so their retirement portfolio provides the right mix of stability and growth. The process starts by mapping out the full scope of the risks that clients face in retirement, then creating a plan that adequately addresses those risks. For many individuals, fixed-indexed annuities (FIAs) can be a key piece of those plans, as the products offer a stable income stream with an appealing combination of upside potential and downside protection.

The following guide will help you frame a discussion about retirement risks with your clients. It's followed by examples of how FIAs can supplement a retirement savings strategy.

Illustrating the four main retirement risks

Market volatility risk:

Concerns about potential losses often dominate clients' thinking. In response, you should illustrate the importance of sticking with a well-thought-out plan that manages such volatility. You could mention that, if a $100,000 portfolio experienced a 20 percent drop, it would then require a 25 percent gain to recoup those losses. This example can be a good reminder about the need to protect against market drops while also maintaining some exposure to the market's growth potential to benefit from the rebound.

Inflation risk:

Modest inflation over the past several years may have put this risk low on clients' list of concerns. But it's important to remind them not to be complacent about a potential decline in the purchasing power of their retirement savings. Inflation has averaged about 3 percent since 1926. You can show clients how much their savings will need to grow to support the same lifestyle at that average rate.

For example, a client planning for $60,000 in annual retirement expenses would need to cover expenses of

• $80,000 after 10 years, and
• $108,000 after 20 years.

Interest rate risk:

Rising interest rates can threaten the fixed-income assets that many clients rely upon for stability in retirement. For example, you can explain how higher interest rates reduce the prices of existing bonds, meaning that an investor holding a fixed-rate bond could face a loss if the bond is sold before maturity.

Longevity risk:

Clients often overlook the real threat of outliving their savings. To reiterate the significance of this risk, explain to clients that, on average, 65-year-old men can expect to live until age 84, while 65-year-old women can expect to live until nearly 87. Further, about 33 percent of all 65-year-olds today will live past age 90.

Addressing multiple risks in a balanced plan

This discussion of risks should illustrate clients' need for steady growth with protection for when the markets head lower. Then you can offer suggestions for addressing those concerns. For many clients, FIAs offer several benefits that help secure a financial plan throughout retirement:

• Reducing exposure to market risk. Assets in an FIA benefit from a portion of the market's upside but are protected against downturns. because an FIA's interest rate will never fall below zero. While it is possible to earn zero percent interest for a given crediting period, you will never earn less than zero. This structure means that individuals can continue to accumulate retirement savings without exposure to potential market losses.
• Protecting against inflation and interest rate risk. If clients are too conservative — for example, holding lots of money in cash-equivalent positions or low-interest-rate assets — they may not be able to meet their retirement expenses. FIAs can provide stable retirement income with growth potential.
• Longevity risk. To ensure that clients' income will last throughout a long retirement, FIAs offer annuitization as well as optional guaranteed income riders that provide a set payment every year until death.

Ensuring that your clients understand the various threats to their retirement savings will help you collaborate on a diversified plan, which delivers the right mix of security and growth. By providing a strong hedge against all the major retirement risks, FIAs can be a valuable addition to a retirement income strategy — while also providing clients with peace of mind that the retirement savings they've worked so hard to accumulate will support the lifestyle they've envisioned.