Making the nest egg last: best products for senior clients
April 18, 2017 by Warren S. Hersch
Entering retirement can be a particularly jarring experience for seniors, and not only because they’re leaving behind the familiar world of work. For the change also requires a shift in one’s financial orientation — from savings accumulation to decumulation.
Above all, the transition brings into focus one overriding goal: how best to “pensionize” a nest egg so that your money outlasts you, and not the other way around.
Among the more 78 million baby boomers in or near retirement, the oldest of whom are now over age 70, retirement income planning has thus become an urgent priority. That’s true, too, for the thousands of agents and advisors who serve these boomers — a demographic group now in possession of lion’s share of the nation’s wealth.
“Americans age 55-plus own almost 70 percent of all investable assets in the U.S.,” says Jafor Iqbal, an assistant vice president at LIMRA Secure Retirement Institute. “That’s a huge concentration of money. So naturally, advisors have changed their focus in recent years to incorporate retirement income planning in their practices.”
In tandem with this shift, insurance and financial professionals are looking to a range of solutions that can best secure senior clients’ post-retirement objectives. Among the main aims are preservation of principal, guaranteed income for life and healthy returns on invested capital.
There’s also this not-insignificant one: tax-favored treatment of retirement assets. This can have a potentially huge impact, not only on the quality of life in retirement, but also on money available to fund a retiree’s legacy planning objectives.
A MULTI-PURPOSE PRODUCT
One vehicle well suited to achieving these goals is cash value life insurance. Ed Slott, a CPA, author and expert on individual retirement accounts, advocates that individuals move assets held in an IRA to a permanent, paid-up life insurance policy. The sweet spot is after 59 ½, when IRS tax penalties on IRA withdrawals no longer apply.
Why do this? Because unlike an IRA, funds in a cash value life policy can be accessed free of income tax (up to cost-basis through withdrawals; and thereafter as policy loans).
The tax-favored treatment also lets policyholders avoid “stealth taxes” that kick in because of increase in taxable income. For example, an IRA distribution could boost tax on Social Security benefits or trigger a 3.8 surtax on net investment income from capital gains, investment income or dividends.
Cash value life insurance is also exempt from required minimum distribution (RMD) rules governing IRAs. Seniors can thus let their policy’s cash value grow beyond age 70 ½ (the age at which IRA holders must begin taking income) on a tax-deferred basis.
“People think of life insurance for the death benefit, but most people don’t know about the powerful lifetime retirement and tax benefits,” observes Slot. “Funds in a permanent life insurance policy can double as a retirement savings account, but without the worry about what future tax rates will be.”
All well and good. But others are unconvinced that life insurance policy is the best place to park retirement assets. If, say, the senior client’s main objective is growth potential, then alternative vehicles may be a better bet, especially in a low interest rate environment, which can depress returns on interest-sensitive universal life policies.
One option to consider: a reverse mortgage, which let homeowners borrow money against their home equity. When interest rates are low, the loan to repaid — structured so as not to exceed the value of the home, and which only becomes due at the borrower’s death or when the property is sold — will be less burdensome. Upshot: more cash on hand to fund retirement or estate planning objectives.
Or so one would hope. Experts caution against rushing into a strategy for funding retirement through loans, whether via a reverse mortgage or cash value life policy. The right technique will ultimately hinge on a rigorous analysis of the options; anything short of that could put the retiree at financial risk.
“You have to run the numbers to see which strategy makes most sense,” says Moshe Milevsky, an associate professor of finance at the Schulich School of Business at York University in Toronto. “The number one question to ask is, ‘What will be the interest rate at which I’m borrowing money?’ If the rate on a policy loan is high relative to a reverse mortgage, which can create a similar tax-free income stream, then the reverse mortgage may make more sense.”
WHAT AM I EARNING?
The prevailing interest rate also must be considered when investing in interest-sensitive fixed income vehicles that can provide a guaranteed retirement income stream. These include savings accounts, bonds, certificates of deposit, money market funds and fixed annuities. Of these, only the last can assure retirement income for life, a top priority of seniors, as recent research indicates.
At the carrier level, an evolution in compensation is already underway. Several companies— Great American, Midland National, Lincoln National and Sammons Retirement Solutions — have recently developed fee-based indexed annuities. Sheryl Moore, president and CEO of Moore Market Intelligence, expects more such products to hit the market, but she believes they’ll need time to gain traction. That’s because of the challenges so many producers face (not least a potentially significant loss of revenue) when making the transition from commissions to fees.
“A lot of companies will launch fee-based indexed annuities,” she says. “But companies selling these fee-based products are not going to instantly see sales success. As to advisors already operating on a fee-basis, few of them sell fixed indexed annuities today.”
The same cannot be said of fee-based VAs. A leader this space is Jefferson National, which the multiline insurer Nationwide acquired last September. Jefferson National’s VA platform, Monument Advisor, boasts nearly 400 mutual fund choices.
A leader in this space, Global Atlantic Financial Group, which markets combo annuity-LTC products through Forethought Life Insurance Co., has achieved success in annuity-LTC sales where other carriers struggled. The reason, notes Moore, is its broad distribution strategy: The company markets its hybrid product, Forecare, through a nationwide network of banks, broker/dealers, IMOs, independent agents and funeral homes.
Linked benefit solutions have achieved greater success in the life insurance space, most notably with indexed UL products. Nationwide, Pacific Life, RiverSource Life, Transamerica, among other insurers, offer combo life-LTC solutions, including riders covering both long-term care and chronic illnesses.
“Life insurance products are better positioned to carry LTC and chronic illness riders, particularly on indexed UL life products,” says Moore. “These riders have become a source of competitiveness for product manufacturers.”
“About 70 percent of American seniors will need long-term care at some point in their life,” she adds. “That’s a staggering statistic.”