Issue link: http://read.dmtmag.com/i/169596
Paychecks and Playchecks: How to Dominate the Retirement Market It's nice to have a long life, but not to outlive your retirement savings. When retirement-planning expert Tom Hegna realized the full extent of that threat to today's seniors, he swung into action on speaker's platforms and with a book. Here are some highlights of how he's helping advisors understand, appreciate, and explain to clients the magic of annuities. What Happened to "Happily Ever After?" Retirement used to be a fairly simple and worry-free process. People would work for the same company for 30 years, and employers would hold a going-away party, present the employees with a shiny gold watch, and provide a guaranteed paycheck for the rest of their lives in the form of a pension. Using this pension, along with their Social Security checks and personal savings, retirees would enjoy a steady stream of retirement income and financial freedom for the remaining 15 to 20 years of their life. Today, pensions are no longer offered by most companies. In fact, only 19 percent of Americans have a pension, and 16 of that 19 percent are government workers. The outlook for Social Security, with the trust fund projected to dry up by 2033, is rather grim. In addition, just as 78 million Baby Boomers were rushing toward retirement, the financial markets saw huge declines, destroying the savings of many during what is mathematically the worst period of time to lose money: the five years before and immediately after retirement. The Longevity Risk Boomers and seniors are facing numerous risks, many of them of unprecedented magnitude. There's orderof-returns risk, market risk, inflation risk, deflation risk, long-term care risk, and more. All of these potential detriments can have a devastating impact on the quality of a person's retirement, but by far the No. 1 risk is longevity, which is actually a risk multiplier. If a person retired at age 65 and died at 68, it would not matter if the stock market dropped 45 percent. It would not matter if they withdrew 12 percent per year from their portfolios or if inflation soared into double digits. They wouldn't have lived long enough for those issues to matter. But if they live past age 90, they have a far greater chance of being affected by these risks, any of which could financially devastate their portfolio. Today, people are living longer than ever before. Just a century ago, the average life expectancy was close to age 50. Now, for a 65-year-old married couple, for example, there is a 50 percent chance that one spouse will live to age 92 and a 25 percent chance that one will live to 97. Thanks to medical innovations and increased health awareness, some of the people reading this article will live beyond the ripe old age of 100. In fact, centenarians are the fastestgrowing age segment in the United States. To retire optimally, Baby Boomers and seniors have to take the longevity risk off the table. This objective cannot be accomplished with stocks, bonds, mutual funds, hedge funds, or money managers. Pensions and Social Security are just one part of the solution. But as previously noted, most people no longer receive pensions, and Social Security is not enough to survive on alone. So the optimal way to eliminate the longevity risk is to purchase a lifetime income annuity or deferred lifetime income annuity. Other annuity and rider combinations can work too, but they pay fewer mortality credits in exchange for some possible market upside. The point is that only an annuity can remove longevity risk. 20 CONNECTIONS | FALL 2013