What would happen if word got out that you’re an advisor who helps clients put their fears of running out of money to rest, so they can enjoy retirement on their terms? Business would be booming! The trouble with our industry is that most of us—advisory firms, plans sponsors and financial professionals alike—don’t do a great job educating clients about guaranteed income. 

We need to modify our approach, so clients feel confident about the path ahead. But how? Our clients aren’t stupid, but we can’t take an “inside baseball” approach, where conversations are loaded with financial jargon and far too much information to digest. Changing how we position guaranteed income to clients is critical if we want to help retirees gain the confidence they need to spend more in retirement.

Key Takeaways:

  • Clients, regardless of wealth, tend to underspend in retirement.
  • When retirees set aside a portion of their retirement portfolio for guaranteed income, they spend more.
  • We need to do a better job showing how annuities enhance our clients’ retirement portfolios. (Helpful suggestions included below.)
  • Clarity helps retirees overcome the fear to spend and enjoy their golden years.

Most retirees tend to underspend in retirement. What gives?

According to research by David Blanchett and Michael Finke, retirees consistently spend about 75% of what they could spend from the assets available to them, with underspending increasing with age. Why? A New York Life study suggests that retirees’ behavior mimics the behavior of their working years, when they were accumulating assets. 

In fact, the study showed that retirees were more likely to reduce discretionary spending (74%) or adjust their budget (67%) than draw from their nest eggs–just as they did during their working years. Old habits die hard, and when you combine that with what is the number one fear of retirees—the fear of outliving one’s assets—you can see why retirees tend to spend less in retirement. 

Retirees with guaranteed income spend more $$$ and enjoy spending it

Here’s what is really interesting. Blanchett and Finke also found that retirees who set aside a portion of their nest eggs for guaranteed income tend to spend a lot more than their counterparts who put more of their assets into investments. 

In addition, research by New York Life also “found that holding wealth constant, retirees receiving annuity income spend 8% more than their counterparts without annuity income. In addition to simply spending more in retirement, annuity owners are more likely to say that spending money in retirement is satisfying (60% vs. 49% of non-annuity owners).”

More clients roll over 401(k)s into IRAs, forgoing guaranteed income 

A 2023 Cerulli Report revealed that IRA assets “remain the largest segment of the retirement market, reaching $13.9 trillion in 2021. Over the past 10 years, IRA market share has increased from 31% to 38% and is expected to grow to 41% by 2027.”

InsurMark Virtual CMO Jack Martin discussed this topic at length with Tamiko Toland on a recent episode of The Breakthrough Advisor Podcast. Toland, AKA the Annuity Yoda, and Michael Finke (the research author referenced above) co-founded IncomePath, a software tool that helps retirees visualize what they can spend in retirement. Toland and Finke created IncomePath because they believed nobody was doing a great job of showing how an annuity really helps a retirement income portfolio.  

According to Toland, “Early on, I had this passion for putting guaranteed income inside of retirement plans because that’s where the participants are. That’s where people are saving money. That’s where people need to have access to lifetime income, and I still believe that that’s true. But behaviorally, we know that most people end up rolling their money over when they retire.”

How to help clients overcome the fear of running out of money 

As we frequently discuss on The Breakthrough Advisor Podcast and in our blogs, advisors need to spend time during the discovery process to get a clear picture of the client’s fears, goals, tolerance for risk and aspirations. If the client has what is the number one fear of retirees—the fear of running out of money—we know a conversation about guaranteed income is warranted. 

While software tools like IncomePath can help clients better visualize retirement allocations and spending, Toland says advisors can also modify how they position annuities to clients, so those conversations make more sense. 

She encourages advisors to put annuities in the same bucket as fixed income (Social Security, pensions, etc.) and discuss how guaranteed income may allow clients to become more aggressive on the investment side of their retirement portfolios. 

According to Toland, advisors can explain to clients that “The guaranteed income coming in is supporting that fixed income allocation, putting less strain on the rest of the portfolio. And because you’re not drawing all those checks out of your withdrawals, you can invest more aggressively and take advantage of that growth. Of course, you will be exposed to some variability, so there is some downside.”

As noted earlier in this blog, research shows that retirees who have a combination of guaranteed income and investments tend to spend more than those who do not. Knowing they have a guaranteed income stream can bring peace of mind.

Adds Toland, “Recognizing the scope of that in combination with having the guarantee, that is the information people need in order to feel like they’re confident in retirement, and they can actually take those withdrawals. They can spend their money. And we all know that when people get a check in the mail, that is like getting a check from their employer. Even if it’s their own money they’re paying themselves back.” 

In conclusion …

Clarifying the concept of guaranteed income is critical during advisor-client “running out of money conversations.” Helping clients visualize what retirement spending will look like based on a combination of investments and annuities can bring retirees the clarity and peace of mind they need to spend the money available to them in retirement. Most important, that clarity can bring retirees more enjoyment in their golden years.

ICYMI: During the podcast Martin and Toland also provided tips for streamlining the discovery process, how to help clients identify the pool of assets they need to spend down and more. You can listen to the podcast in its entirety here.

Want to learn how InsurMark helps advisors go from good to great?

As an Advisor Development Organization, we have the tools, technology, training and mentorship top advisors rely on to get there. To schedule a discovery call and learn more about our proven Value Engineering Process, contact our office toll-free at (800) 752-0207 or connect with us online.

As an ADO – Advisor Development Organization™, InsurMark provides solutions to meet the ever-evolving needs of financial professionals with a mission to protect and enhance the financial security of every home in America.