Help Clients Evaluate a Potential Income Gap in Retirement

For many people, retirement planning often involves working toward a savings goal, such as $750,000, $1 million, or whatever amount they feel is right for their nest egg. While a savings target can be a good starting point for planning, it leaves some important details unresolved. Most notably, a savings target doesn’t immediately answer a client’s critical question: “Will I have enough income to support my retirement lifestyle?”

It can be difficult to calculate how much monthly retirement income a lump-sum savings balance would provide. That lack of clarity may leave clients feeling unprepared for both predictable, day-to-day expenses and unexpected costs that arise in retirement.

Another approach can help financial professionals and their clients create stronger retirement plans: First, project potential retirement expenses. Then, determine how much income clients can expect from Social Security, retirement accounts, and other assets to see if there may be a shortfall.

Based on this analysis, financial professionals and clients can develop income strategies to help ensure that there will be enough guaranteed income to cover anticipated expenses even when market conditions impact retirement account values. Having this income baseline can help clients feel more confident they’ll be able to pay their bills in retirement—and it creates the flexibility to use other assets to adapt to surprises and unexpected costs that may arise.

Estimating retirement expenses

 

The first step is estimating a client’s potential income needs in retirement. Many financial professionals are familiar with the rule of thumb that says to target 80% of pre-retirement income, but that rough estimate may be just a starting point. The 80% rule doesn’t provide flexibility for an individual’s needs and goals—and it lacks specific details about where that income will come from.

A better approach is to break down projected spending by categories using a tool such as the Future Income Planner from Brighthouse Financial. This approach can help clients estimate their total projected mandatory expenses and discretionary spending.

After tallying total expenses, financial professionals can then help clients estimate total guaranteed income from sources such as Social Security and pensions. For many clients, monthly guaranteed payments won’t be enough to cover monthly bills. But once you’ve identified this gap, you can begin discussing ways to close it.

Filling the gap and creating flexibility

 

Traditionally, financial professionals and clients often relied on bonds and bond funds as a source of relatively stable income to help supplement income from Social Security and reduce exposure to stock market volatility. Today, however, with Treasury yields below 2%, fixed-income solutions may be less appealing and may not create retirement plans with sufficient resiliency to withstand higher-than-expected bills and other unforeseen circumstances in retirement.

Instead, clients might prefer the certainty that comes from diversifying their income sources by adding other sources of guaranteed income, such as annuities. The wide range of annuity options means that financial professionals can help clients find products that meet their specific income needs and other priorities.

For example, depending on the size of the income gap to fill, clients can weigh whether they want to maximize their monthly income from an annuity or include additional features such as the ability to leave a legacy for their spouse or heirs. Financial professionals and clients can also choose an annuity product based on a retirement time horizon. Clients in or about to enter retirement may decide that an annuity with a guaranteed living benefit or an immediate annuity is the best fit for their retirement plan. Others who are still approaching retirement might choose an annuity that offers a measure of growth potential for their savings and a delayed start for income payments.

Financial professionals can explore how annuities can help close a client’s income gap using the Brighthouse Financial Annuity Income Calculator. Whichever approach best fits a client’s needs, fully covering mandatory retirement expenses with guaranteed income sources can provide other benefits—including greater flexibility in managing other retirement assets.

When clients know that their day-to-day expenses are covered, they may feel more comfortable investing other retirement assets for growth to help build wealth for discretionary expenses or unexpected bills. If market conditions temporarily reduce money available for discretionary spending, clients can take comfort knowing that their mandatory expenses are covered. (For more on how additional guaranteed income can help retirement plans weather the unexpected, read “Helping Clients Protect Their Retirement Income Stream,” the second article in this series.)

By helping clients project their retirement expenses and identifying a potential income gap, financial professionals can develop clearer, more effective retirement plans that match costs to specific sources of income. With that level of detail, clients can feel more confident that their plan will help them meet their retirement goals, while also preparing them to handle the unexpected.