Longevity Concerns: How to Help Clients Solve for Additional Income Needs

Forty-one percent of CPA personal financial planners say that running out of money is their clients’ biggest retirement fear.¹ And it’s easy to understand why. Longer lifespans, rising healthcare costs, volatile markets, and historically low fixed-income yields create unique challenges when planning for sustainable retirement income.

This combination of factors is changing the equation for retirement income planning methods. For example, many retirees previously used the so-called 4% rule to determine a safe withdrawal rate from their retirement savings. Today, that strategy is just a starting point for deeper discussions that include considerations about how a portfolio’s asset mix and anticipated returns might affect income potential.

For these reasons, retirement income planning must weigh each individual’s circumstances against broader market and demographic trends. Here is a look at four factors to consider when estimating clients’ retirement income needs.



One of the greatest planning challenges is accounting for how long your clients’ retirements will last. Among married couples, both age 65, there is a 50% chance of one spouse living to age 92 — and a 25% chance of one spouse living to age 97.²

Couples with an age gap present additional challenges. Consider this: 5% of first marriages and 20% of remarriages are between individuals with a 10-year or greater age difference.³ In these cases, instead of planning for income lasting 20 or 30 years, a portfolio may now need to generate income for 40 or 50 years. According to a recent survey, some advisers now base retirement-income plan projections on an average life span of 91 for men and 94 for women.⁴

Rising life expectancies are a key concern for clients when planning for essential expenses in retirement. In response, consider discussing how guaranteed income solutions can address the risk of one or both spouses outliving their resources due to a longer lifespan.



Thanks to longevity, healthcare costs will likely consume a significant piece of your clients’ retirement budget. An EBRI survey found that 64% of people are “terrified” of the impact of runaway medical expenses on their retirement savings.⁵ That fear comes as no surprise when you consider that retirees should have $264,0006 just to cover out of pocket healthcare expenses.

The impact of higher medical costs on savings could put retirement income in jeopardy. Helping clients determine a reasonable estimate of future healthcare costs can improve their retirement readiness.



The impact of a market downturn can have serious consequences for retiree income — especially if it occurs in the early phase of retirement. This phenomenon is commonly referred to as sequence-of-returns risk, and refers to the impact of taking distributions from an investment that’s already declined due to poor returns. A market drop can significantly reduce the amount of money available to retirees. And even if the market recovers, it can be more difficult to recoup losses when an individual is taking withdrawals.

Consider this hypothetical example: If a $100,000 portfolio declines 10% in one year due to poor market performance, it would take an 11.1% return the next year for that account to regain its full $100,000 value. But if the portfolio owner was retired and made a 4% income withdrawal the same year his portfolio had declined 10%, it would take a 15.7% return the following year for the portfolio to recover its full value.

Simple examples like this help illustrate the risk of making retirement income withdrawals during down markets — and can make clients appreciate the importance of planning to protect against volatility early in retirement. Using product diversification strategies and establishing a source of guaranteed income can help individuals mitigate this risk.



While Americans are living longer, their retirement age has remained relatively unchanged. Unlike previous generations, however, today’s retirees have fewer sources of guaranteed income.

• Decline in traditional pensions: Today only 1 in 8 private sector workers have a pension.⁷ What’s more, a record number of multiemployer pension plans — 71 in all — receive financial assistance from the Pension Board Guaranty Corporation.⁸
  
• Social Security is not enough: Social Security benefits are only designed to replace about 40% of the average worker's wages during retirement. ⁹
  
  

As a result of these trends, your clients must use personal savings to make up the difference and sustain them in retirement. Identifying solutions that offer reliable, pension-like income and a level of protection against market downturns can help individuals navigate the retirement income challenge.

Show your clients the value of income protection
At retirement, an individual’s focus shifts from working to generate income that can build savings to managing those savings to generate the income they need. You can help with this transition by explaining how converting a portion of assets into an annuity can be an effective way to:

• Bridge the gap between savings and future income needs
• Provide a guaranteed source of income to help cover expenses
• Offer some protection against market downturns
• Reduce the risk of outliving assets
• Allow non-annuity assets continued growth potential
  
  

While there is no single way to overcome the challenges of producing guaranteed retirement income, taking advantage of multiple opportunities to mitigate the risks clients face in a long retirement can strengthen an overall plan. Consider adding annuities to a client’s diversified portfolio to add a level of guaranteed income and income protection.