Retirement Planning: Baby Boomers require a new strategy

April 5, 2011 — Dave Paulsen, Chief Sales Officer of Transamerica Capital Management (Transamerica), shares his perspective on how different retirement income planning methods are evolving and the kinds of tools financial professionals will use in order to best meet their Baby Boomer clients’ growing needs for taking income in retirement.

“The retirement landscape is unlike anything we’ve ever seen before, with new challenges that are changing the way retirees receive retirement income,” says Paulsen.

“There are three key components that are shaping the way financial professionals interact with their Baby Boomer clients.

1.)    Reevaluating Past Methods

Financial professionals are beginning to realize that there is truly no “one-size fits all” approach to creating a client’s lifelong retirement income plan. Traditional methods, such as the “4% rule,” or the “bucket approach” must be combined with other creative and diverse tools in order to accommodate a client’s retirement income needs and help them to maintain their standard of living for the rest of their lives. This is especially important if you consider the state of the equity markets over the past decade – most clients can’t afford another market downturn. Financial professionals whose clients are approaching retirement, as well as clients who have already retired, are required to take a more personalized approach than ever before.

2.)    New Health Care Concerns

Retirees and those approaching retirement are facing enormous health care costs, whether it’s buying long term care insurance, paying for an assisted living facility, or affording in-home care. The most recent data from the U.S. Department of Health and Human Services says the average long term care insurance premium for a person aged 65-69 is $2,500 per year, and for age 70 and above is $3,000 per year. (1) The costs are much higher for those who don’t qualify for long term care insurance and therefore have to pay for their entire stay at a nursing facility out of pocket. The Center for Retirement Research at Boston College says that lifetime uninsured health care costs for a 65 year old married couple in 2010 were an average between $197,000 and $260,000. (2) Financial professionals will have to familiarize themselves with these new challenges in order to find effective ways to help their clients pay for these growing expenses.

3.)    Social Security Awareness

The AARP says more than 7,000 baby boomers will turn 65 every day this year. (3) The earliest age a person can start receiving Social Security retirement benefits is 62, and for those born between 1943 and 1954, the full retirement age is 66. (4) Financial professionals must be well-positioned to help their clients navigate the often confusing aspects of the nation’s Social Security system, and discuss the potential advantages of delaying these benefits. Social Security is a major part of retirement income planning for baby boomers, and it’s imperative that financial professionals become knowledgeable on this subject to best serve these clients.

Providing clients with the tools they need to sustain their pre-retirement lifestyle can be a challenging process because, as I mentioned before, there is no “one-size-fits-all” strategy. But there is a valuable resource out there that has the potential to meet and overcome this challenge: the variable annuity. Variable annuities, along with an optional living benefit rider, are catching on. According to LIMRA, the election rate of variable annuities with a guaranteed living benefit rider rose to 89% in the third quarter 2010, which is a trend we expect to continue.” (5)

“Variable annuities offer guaranteed lifetime payout options, guaranteed death benefit options, and tax-deferred treatment of earnings. And, optional living benefit riders that accompany variable annuities can provide solutions to a variety of retirement income concerns,” says Paulsen. “Variable annuities can play a substantial role in a retirement income strategy, whether it’s used as a method to supplement income for health care costs, or even to fill the income gap Social Security leaves behind. Financial professionals must educate themselves about the different variable annuities available today, and incorporate these tools into their practice in order to best suit their clients’ needs.”