Michael Finke, PhD and CFP^®, shows how protected income can help even anxious retirees feel comfortable spending their retirement savings and enjoy retirement.

When it comes to saving and spending without pensions, many of today’s retirees base their financial plans around their fears of outliving their funds. While it’s important to be cautious, too much anxiety can lead clients toward emotional decision-making—to the detriment of their overall satisfaction in retirement.

How can retirees in a post-pension world plan for expenses, emergency savings, and potential legacies without risking their own enjoyment and fulfillment?

Imagine Retirement Savings as a Loaf of Bread

Finke outlines a new way of thinking about retirement savings in this recent white paper, A Protected Approach to Retirement Spending. He paints retirement savings as a loaf of bread with slices set aside for both emergency and legacy planning. The remaining portion must be strategically divided to last the rest of retirees lives—a challenging proposition when retirees don’t know exactly how long their retirements will be. If they try to slice the smallest portions possible, clients run the risk of underspending and living an unsatisfying retirement. If they opt to spend more earlier, they could overspend and end up needing to dramatically cut costs later in life—or outlive their savings altogether.

Rather than using guesswork to divide retirement funds, Finke suggests a protected approach. By setting aside a small portion of their bread loaf (retirement savings) in a financial product that provides lifelong income, clients can hedge for unpredictable markets, help mitigate the risk of outliving their funds, and plan to create the retirement lifestyles they want. And create a bread supply that won’t run out.

Retirement Spending with Satisfaction in Mind

Typical strategies for meeting retirement spending goals include:

• Investing in more conservative assets such as bonds—These conservative investments would yield a modest income with minimal risk of losing investors’ principal. However, those comparably modest returns likely will not be enough to cover inflation on their own, affecting investors’ abilities to spend later in life.
  
  
• Creating a balanced portfolio—Clients could expect a more competitive return to account for inflation, but retiring into a low or negative sequence of returns could cause them to run out of savings even earlier than expected. Sequence of returns risk—possibly resulting in low or negative returns early in retirement—is a reality those who opt for equity exposure must accept.
   

Both options, while useful in their own ways, force clients to carry at least some risk of outliving their retirement funds. Finke’s solution is to integrate the higher returns of a balanced portfolio with the security of conservative investments by working with an insurance company to guarantee a minimum lifetime income. Clients would pay a premium for this optional benefit, but they would have a source of retirement income that is protected for life.

Finke concludes by reiterating that the value of insurance is designed to protect against longevity and sequence of returns risk. Reducing these risks by adding income protection provides a strategy for clients who are focused on a comfortable lifestyle without the risk that by living well today, they might ultimately sacrifice spending in the future.

Asking if clients are spending enough to enjoy the retirements they envisioned is a wonderful way to build relationships and add real value to their lives while creating new opportunities to strengthen your business. You will find the full white paper below in “Additional Resources and Links” for your review.

Next Steps

Some clients may benefit from adding protected income to their retirement portfolios. This may be a great time to review their plans and discuss the value protected income can have for them. Share with them the analogy of creating a bread supply to enjoy in retirement. Start the annuity conversation today!

Additional Resources and Links

Income Planning

A Protected Approach to Retirement Spending

Build Your Practice with the “Lifetime Income Conversation”

Retirement Income Translator Tool

For more information about retirement-planning, please contact our Retirement Strategies Group at RSG@PacificLife.com or (800) 722-2333, ext. 3939. PacificLife.com

All guarantees are subject to the claims-paying ability and financial strength of the issuing insurance company and do not protect the value of the variable investment options, which are subject to market risk.

This material is provided for informational purposes only and should not be construed as investment, tax, or legal advice. Information is based on current laws, which are subject to change at any time. Clients should consult with their accounting or tax professionals for guidance regarding their specific financial situations.

Investors should carefully consider a variable annuity’s risks, charges, limitations, and expenses, as well as the risks, charges, expenses, and investment goals of the underlying investment options. This and other information about Pacific Life are provided in the product and underlying fund prospectuses. These prospectuses should be read carefully before investing.

Annuity withdrawals and other distributions of taxable amounts, including death benefit payouts, will be subject to ordinary income tax. For nonqualified contracts, an additional 3.8% federal tax may apply on net investment income. If withdrawals and other distributions are taken prior to age 59½, an additional 10% federal tax may apply. A withdrawal charge and a market value adjustment (MVA) also may apply. Withdrawals will reduce the contract value and the value of the death benefit, and also may reduce the value of any optional benefits.

Michael Finke is not affiliated with Pacific Life.

Pacific Life refers to Pacific Life Insurance Company and its affiliates, including Pacific Life & Annuity Company. Insurance products are issued by Pacific Life Insurance Company in all states except New York and in New York by Pacific Life & Annuity Company. Product availability and features may vary by state. Each insurance company is solely responsible for the financial obligations accruing under the products it issues.

Variable insurance products are distributed by Pacific Select Distributors, LLC (member FINRA & SIPC), a subsidiary of Pacific Life Insurance Company (Newport Beach, CA) and an affiliate of Pacific Life & Annuity Company, and are available through licensed third parties.

This material is educational and intended for an audience with financial services knowledge.

Guarantees are subject to the claims-paying ability and financial strength of the issuing insurance company.

This material is provided for informational purposes only and should not be construed as investment, tax, or legal advice. Information is based on current laws, which are subject to change at any time. Clients should consult with their accounting or tax professionals for guidance regarding their specific financial situations.