• Retirement and Annuity Advisor Jennifer Lang

What Does Your Advisor Use for Retirement Income Planning Strategies?

Updated: Nov 7, 2020

As another year passes by, more people join the ranks of retirees. Since 2011, roughly 10,000 baby boomers have turned 65 years old each day, according to Pew Research. It predicts that trend to go on until 2029.


Annuity Quote

From second-act careers to volunteering and entrepreneurship, baby boomers are already reshaping the mold of retirement. And they are bound to keep redefining it, as record-breaking millions are set to leave the workforce.


With a new era of retirement living on the horizon, it’s prudent to take note of our retirement income planning strategies.


Will they provide reliable income streams and financial security for what could well be a decades-long retirement? Do they give a long-term assurance of you being able to enjoy your desired lifestyle? Or when it comes to these goals, does your income strategy have more of a question mark hanging over it?


In their career years, many people work with a financial advisor to build their life savings and plan to continue so in retirement. One notable survey of 200 advisors by investment company Incapital shows how advisors are preparing today’s retirees for the economic uncertainties of tomorrow.

The survey's focus? What retirement assets these financial advisors were using to generate retirement income for their clients.


Changing Focus to More Fixed Income


The survey drew responses from advisors from all sorts of firms, including RIAs, wire houses, banks, and independent broker/dealers. Among other queries, the advisors were asked about client reactions to market conditions. They also talked about what they were doing to meet their clients' retirement income needs.


When asked about investors' openness to the benefits of fixed-income assets, the advisors said it would take a "significant equity market event" (or market correction) for them to come around. The advisors also described the types of vehicles they relied on in client portfolios.

The different income-paying vehicles were:


Dividend-paying stocks (used 51% of the time)Equity income mutual funds (43%)Annuities (43%)Bonds (38%)Bond mutual funds (39%)Bond exchange-traded funds (29%)


Appetite for Risk Lingers But Can Change

Paul Mottola, a managing director at Incapital, recognized the dynamics that long-time low interest rates and a record-setting bull market brought.


"With prolonged low interest rates and the sustained equity bull market, investors seeking income might have become comfortable taking on equity risk to accomplish income needs," he explained then in a company statement. "That may explain why advisors say it will take a significant correction in the equity markets for investors to appreciate the benefits of fixed income."


"But with increased volatility in the market, we believe that investors will be [more receptive] to some of the potential benefits of [fixed-income assets], such as portfolio diversification and lower volatility," he continued.


"This is especially true among investors who have taken equity risk for income, and those who now may be focused on principal protection and a fixed and predictable stream of income."


Mottola's statements echo another more recent survey of financial advisors. While, overall, advisors were optimistic about the future, many worried about how lingering risks on the horizon could affect their clients' well-being.


Some advisors reported taking more defensive positions with their clients' money for the near future as a proactive guard against downward market movements.


The Rationale Behind Advisor Income Strategies


What about the advisors' objectives with these income-focused assets? According to the survey, "the top three benefits they seek from fixed income investing for their clients are" the following:

Providing a predictable rate of income: 53%Portfolio diversification: 51%Return of principal at maturity: 38%


Risks to Future Income Security?


There are a few risks that can impact the use of fixed-income and low-interest instruments in retirement planning:


1. Interest rates may continue to be low. That will make it harder to use fixed-income assets and other low-risk interest-earning instruments for monthly income streams or other retirement financial goals.


2. Big banks and other financial companies are projecting that future market returns may be lower than those during this 10-plus-year bull market run. While no one can ever know with certainty what the market will do, stock market valuations are currently quite high.


If you are buying stocks or other equity market-based assets at record or near-record highs, you may face reduced growth potential for those assets in the future. Of course, that depends on how long your holding period is for those assets, as well.


Put More Guarantees in Your Income Planning Strategy


No matter what happens, though, nothing beats having financial security yourself. Creating a retirement income plan can help you make the most of your money and be ready for changes as they come.


Not only that, it pays to consider annuities as part of that plan. Here are some strengths that annuities bring to the table:


1. Under annuity contract terms, insurance companies are contractually bound to make monthly income payments to you. Annuities are the only financial vehicle capable of truly paying a guaranteed lifetime income.


2. Fixed annuity premium dollars are generally managed very risk-consciously. Unlike even banks, insurance companies are required by law to maintain dollar-for-dollar reserves for every dollar of annuity premium they receive.


The insurance company pools the premium money into an overall general fund. Thus, the risk for one annuity policyholder is pooled with thousands of other policyholders who have money with that insurance company.


The money from fixed annuity contracts is put into low-risk fixed-income assets such as Treasuries and investment-grade bonds.


3. Insurance companies also use actuarial calculations in their payouts to policy