I was fascinated with the legend of King Arthur when I was growing up. From the classic Disney animated film The Sword in the Stone to more modern adaptations of this romantic tale, what young man can’t grow up envisioning himself as the heir to the kingdom, pulling the mystical sword Excalibur from its stony sheath? Or when King Arthur is near death, the faithful knight, Percival, completing a dangerous quest to return the Holy Grail to Camelot so the king could drink from the cup and be restored? Who wouldn’t want to be Percival?
Whether it is the frantic search by the knights of King Arthur (and later the Knights Templar) to recover the Holy Grail, Ponce de Leon’s fabled trip to Florida in 1513 to find the mysterious Fountain of Youth, the Peaches of Immortality of Chinese mythology, or the quest for the ancient philosopher’s stone, history is filled with classic tales of individuals in search of a mystical elixir of eternal life.
Hollywood has added to the lore of the eternal youth legend. Whether a new spin on the search for the philosopher’s stone or the Holy Grail, some futuristic or alien invention, taking the heads of other immortals or darker tales that grant immortality through a vampire’s (or werewolf’s) bite, audiences still flock to see tales of those who can beat the odds and live well beyond their years.
Today, scientific research and medical technology are making great strides into lengthening our time here on earth. In fact, several studies point out that the baby boomers will live longer in retirement than any previous generation in recent history. An infographic in the summer 2018 issue of Popular Science states, “The average baby boomer will live 20 years longer than their grandparents did.”
Financial advisors have shifted their attention in recent years to addressing the ticking long-term care time bomb that looms over an aging American populace. Although incorporating LTC planning into a comprehensive plan is important, there remains a growing element that is often overlooked.
We survive the things that used to kill us, and that is reshaping the retirement landscape. Today’s retirees can expect to live 20-25 years or longer in retirement. For married couples, it pushes the likelihood of at least one spouse living beyond the age of 90 to nearly 50%. That raises the specter of a generation of survivors with little or no financial assets to provide for their needs.
Longevity is a blessing and a curse. It’s a blessing when living longer gives people more time to do the things in retirement they always wanted to do. It’s a curse when people realize they haven’t saved enough (and Social Security isn’t going to be enough) to provide for their financial needs during a 20- to 25-year retirement. Combine that with a lack of LTC contingency planning and we see the brewing of a “perfect storm” for a growing demographic of widows and widowers who will have little or no assets to provide for their welfare and well-being.
As I spend time training and working with financial advisors, I have the same basic conversations over and over. Social Security claiming, accumulation vs. income annuities, Roth IRA conversion, annuities with chronic care riders or hybrid Life/LTC or annuity/LTC solutions. We’re still advising our clients as if they will have the same retirement experience our parents and grandparents had.
Longevity is a very real threat to retirement. Our role as financial advisors is not only to answer our clients’ questions, but it is also to answer the questions they don’t know they should be asking. Our clients look to us to give them guidance and to help them see the potholes in the road ahead, so they don’t blow a tire and end up on the side of the road while cruising down the retirement highway. Survivor income planning is a growing threat to an aging populace and should be a conversation you have with those you’re working with.
If a married couple, age 65, retires today needing $60,000 a year to maintain their lifestyle in retirement and they experience “boomer inflation” of 3% annually, they would need $78,286 at age 75 and $105,210 at age 85 simply to maintain the purchasing power of their present dollar retirement income. To look at it another way, $60,000 in today’s dollars would only be worth $34,217 when they reach age 85.
With the odds of at least one spouse living to at least age 90 close to 50%, survivor planning takes on an entirely new meaning. According to census data, husbands tend to predecease their wives by an average of five to seven years. That means the need for sustainable, lifetime income needs to cover two lives. It requires a different conversation.
Social Security optimization is often focused on how much money can we get today while both husband and wife are living. Knowing that one of the
Social Security checks goes away at the death of the first spouse, perhaps a better, more appropriate conversation is how much money can we get to maximize the benefit today and tomorrow, so the surviving spouse can have as much money as possible.
Split annuity strategies can help address this survivor concern. For example, Bob, a 65-year-old married man with $500,000 in his 401(k) needs $30,000 a year in income, including Social Security. He is risk-averse as he approaches retirement and has sufficient assets (in addition to his retirement) for an annuity solution to be suitable and appropriate. His spouse is 65, and likely to outlive him by five to seven years.
In order to maximize the Social Security benefit for the surviving spouse, Bob chooses to defer claiming until age 70. To create the necessary income stream for the first 10 years of retirement, a premium of $275,000 in a 10-year period certain single premium immediate annuity can generate $31,504 annually, solving the first 10-year income obligation.
If Bob places the balance ($225,000) in an accumulation-focused fixed indexed annuity, he could essentially double that sum without market risk ($460,311) over the same 10-year period (based on historical returns). This nearly replenishes the initial sum of his 401(k). Now at age 75, Bob can replicate the process for another 10-year period.
Assuming he wants to increase his annual income by 30% to offset inflation at age 75, Bob now wants $39,000 annually. With monthly Social
Security benefits beginning at age 70 ($29,664 annually in this example), he can use $85,000 from his FIA to purchase another 10-year period certain SPIA that would generate $9,737 annually. This now provides 30% more income to Bob ($39,401 annually), with the balance of his money still growing in a risk-protected financial instrument.
In this scenario, Bob and his spouse enjoy income totaling $726,240 over a 20-year period from the two SPIAs with $767,821 remaining in an accumulation-focused FIA (based on historical returns). This is a cumulative financial benefit of $1,494,061 from his original $500,000 in available retirement assets if either (or both) lives to age 85. Of course, RMDs would reduce the value of the accumulation-focused RIA but could remain available for future spending needs of the spouse if they were retained in a savings vehicle rather than spent as current income.
By waiting to claim Social Security at age 70 and maximizing that benefit, Bob would also enjoy a 24% larger monthly benefit check than he would have received at age 65, as well as leave a larger benefit check for a surviving spouse. The FIA account value could also be used to help defray other expenses in retirement, replicate the SPIA process for a surviving spouse or simply be left to provide an estate to heirs or a favorite charity.
Today’s boomers are drinking deeply from the Holy Grail. Your mission, should you choose to accept it, is to have that important survivor income conversation with your retiree and pre-retiree clients.