How to prepare employees to manage life after earned income ends
Retirement planning can intimidate employees for a variety of reasons, but the idea that there will no longer be a comfortable influx of income once they stop working is often the most daunting part of the equation. With the right knowledge and guidance, your clients’ employees can confidently enter into retirement.
As their employee benefit adviser, it is your responsibility to provide clients with the right resources for them to counsel their employees and relate retirement income to them in a way they can easily understand.
Retirement planning can be overwhelming for even the most organized and financially savvy individuals. Most people manage their finances and pay for expenses with paychecks throughout their working years, but the comfortable cycle of receiving income comes to an end after retirement. Suddenly, their 401(k), Social Security money and personal savings are the only sources of money they will have for the rest of their lives. They have to manage living without earned income and may have to do so for decades. There is a 50% chance that one out of two 62-year-olds will live to the age of 92 — this means that they will have to live without earned income for nearly as long as they lived with it.
Fluctuation in the market is a significant challenge that many people fail to take into account as they plan for retirement. Since the Great Depression, the stock market has had a correction of 20% or more every six to eight years. This translates to four or five dips of 20% or more over the course of someone’s retirement. Your clients’ employees will have to navigate these fluctuations while they are taking money out of their accounts instead of putting money in. It is critical that they think about inflation, life expectancy and interest rates in the early stages of retirement planning.
Simplify through storytelling
As is the case with many financial planning topics, retirement planning can be simpler with the use of storytelling. The easiest way to demystify post-retirement income for employees is to relate it back to their pre-retirement finances. A great method for this is to ask questions about their financial habits and knowledge, which in turn will naturally guide them through a narrative about the importance of retirement income protection.
For example, if you ask an employee how they have typically received income in the past, they will likely answer that their income is from a paycheck. Then ask if they have considered how their lives may change in retirement once their paychecks stop. Follow up on that thought and ask them where they believe interest rates are going and how it will affect them in retirement. These questions will test their knowledge on retirement income and lead them to the natural conclusion that they need to learn more and create a comprehensive plan to secure their financial future.
Once employees understand the need to plan for a reliable form of income in retirement, they will want to hear solutions that will bring safety and predictability back to their finances. Annuities, particularly Qualified Longevity Annuity Contracts (QLACs), are some of the most underutilized solutions for retirement income protection. Annuities provide the stability and security of a guaranteed income stream, like a paycheck would pre-retirement. QLACs in particular can help employees decrease the taxable income from required minimum distributions toward the beginning of their retirement while also providing them with a guaranteed larger income later in life. This is a significant benefit created by U.S. Treasury regulations to help reduce the chance of running out of income as life expectancy increases.
As you help your clients guide their employees through their retirement planning journey, your priority should be to make the process as unintimidating as possible. If you can relate the challenges ahead of them to finance topics they are already accustomed to, they will be able to form a smart and comprehensive retirement plan that works with their lifestyle.