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3 Steps to Help Clients Balance Protection & Growth for Retirement

August 18, 2021

This article was originally published in Life & Health Advisor Magazine.

Coming off of 2020, a year of upheaval defined by the COVID-19 pandemic, social justice movements and a highly contested presidential election, there are hopes that the “new normal’ in 2021 will be more balanced. For the vast majority of investors who realized that they could be blindsided by outside events—even if they did all the right things to manage their finances—regaining financial balance will be a welcome change.

The outlook for this year has been more optimistic, especially as Washington moves to provide more pandemic relief and get vaccines into more arms. But we’re not out of the woods yet, as the delta variant is growing and the country races to get more people vaccinated. It’s likely you’ll be helping clients regain and maintain balance in their financial plans for the foreseeable future.

Investors turn to advisors in times of volatility. Nationwide’s 2020 Advisor Authority study of more than 2,500 advisors, financial professionals and individual investors found that when markets are volatile, investors say the most important benefits of working with an advisor are helping them protect assets against market risk and staying focused on long-term goals.

To help your clients balance protection and growth to achieve their long-term retirement goals, you can start by focusing on three steps—mitigate the impact of taxes, manage market risk and consider new ways to protect their retirement plans.

Mitigate the Impact of Taxes

Taxes can be one of the biggest expenses a client can face, almost 30-50% of their earnings when federal, state and local taxes are combined. On average, Americans spend more days working to pay taxes than they do to pay for housing, food and clothing combined.1 Taxes can also hinder the performance of portfolios.

Yet, the Nationwide Retirement Institute’s Tax-Efficient Retirement Income Study found that 1 in 5 (20%) investors do not receive tax planning from advisors. Additionally, more than a third of current retirees (35%) did not consider how taxes would affect their retirement income when planning for retirement and roughly one-third wish they had better prepared for paying taxes in retirement.

With the federal government allocating trillions of dollars in pandemic relief, at the same time that many states face budget shortfalls, it has been expected that taxes would need to increase at some point. Under the Biden administration’s proposed tax plan, tax rates for corporations and wealthy Americans are likely to rise, though it seems unlikely we’ll see large-scale changes this year, while the economy is still on the rebound from COVID. But the wheels could be in motion for 2022 and beyond.

Now is the time to consider and begin to prepare for future tax changes that may impact your clients, their families and their businesses at the federal, state and local levels. This could include everything from individual income and capital gains taxes, estate and gift taxes, real estate taxes, corporate taxes and payroll taxes, as well as changes to deductions and incentives.

Start by incorporating a tax diversification strategy into your clients’ plans to control how much they pay in taxes and when those taxes are paid. Help them understand that not all investments have the same tax impact. Some are inherently more tax-efficient than others, depending on whether the investments are taxed at lower long-term capital gains rates or at higher rates for short-term capital gains and ordinary income. Just as you help your clients diversify risk across a range of different asset classes, you can help them diversify taxation across a range of different taxable, tax-deferred and tax-free vehicles. Diversifying across different types of taxes will also give your clients flexibility should tax laws change.

In addition, an asset location strategy is proven to help minimize the impact of taxes and help clients potentially increase returns without increasing risk. You can locate assets that are more tax-efficient in taxable accounts and assets that are less tax-efficient in tax-deferred or tax-free vehicles. Start with 401(k)s and Roth 401(k)s, as well as traditional IRAs and Roth IRAs. Once these have been maxed-out, low-cost Investment Only Variable Annuities (IOVAs) can be a solution for even more tax-deferred accumulation. The tax savings of an asset location strategy can be substantial, especially for those in a higher tax bracket.

Protect Assets by Managing Market Risk

According to Advisor Authority, only 64% of investors had a strategy to protect their assets against market risk, compared to 91% of advisors and financial professionals. Investors could use your help.

To protect against market risk, nearly half of investors (48%) said they would choose an annuity as part of their holistic financial plan. More notably, nearly three fourths of Millennial investors (72%) and nearly two-thirds of Gen X investors (61%) said they would likely choose an annuity to protect against market risk, compared to only 36% of Boomer investors.

Annuities can be an effective option for a holistic financial plan because they can be designed to provide clients with a combination of upside potential to help them accumulate more, and downside protection to preserve their portfolio. There are a range of different annuities that can balance the growth and protection needs for different clients with different risk profiles.

Fixed indexed annuities (FIAs) may be suitable for your conservative to moderate clients. Research indicates that FIAs may be suitable as a bond substitute, for greater diversification, to help de-risk portfolios and to mitigate longevity risk.2 Unlike other fixed investments, FIAs can offer greater upside potential linked to the performance of an underlying index, which may be beneficial in today’s persistent low rate environment . And for risk-averse investors, one key feature is that the insurer can guarantee principal protection, meaning clients can’t lose their initial investment or credited earnings, even when volatility is rising or when there is a sharp market downturn. Note that all guarantees are subject to the insurer’s claims-paying ability.

For the moderate to aggressive clients, who are willing to take on additional risk in exchange for more upside potential, Registered Index-Linked Annuities (RILAs) have become increasingly popular. In fact, according to Cerulli’s U.S. Annuity Markets 2020: A Decade of Adaptation report, RILAs are poised for robust growth and RILA sales are projected to continue increasing faster than any other category of annuity through 2025.

RILAs allow clients to benefit from stock market growth, based on the performance of one or more underlying indexes, such as the S&P 500, NASDAQ 100 or a range of hybrid indexes, while also benefiting from a level of protection against market risk through a structure like a buffer or a floor. RILAs with a buffer structure can protect against losses within a specific range, which can be effective to help mitigate losses from ongoing volatility. While they can offer more upside potential, there is greater risk of substantial losses, should markets fall below the specific range and stay lower for longer.

Some RILAs, have a floor structure to provide a clearly defined level of protection. Any losses below the floor are absorbed by the insurer, to limit a client’s losses in a severe market downturn. Defined Protection Annuity (DPA), Nationwide’s recent entrant into the RILA category, provides a floor to limit losses, and offers the flexibility to manage the balance between protection and growth. Advisors can dial up or down based on a client’s risk tolerance, and effectively adjust the level as their risk tolerance changes over time. This is important as research has shown that clients cannot afford to lose more that 10% of their savings without changing their plans.3

New Ways to Protect Retirement with In-Plan Annuities

Two pieces of legislation that have the potential to help your clients save more for retirement and generate more retirement income are the Setting Every Community Up for Retirement Enhancement (SECURE) Act, passed in late 2019, and the Securing a Strong Retirement Act of 2020 (SECURE 2.0).

One key provision of the SECURE Act makes it is easier for employers to offer in-plan annuities within 401(k)s or other workplace qualified retirement savings plans. Qualified plans have become a predominant vehicle to accumulate for retirement, and in-plan annuities can help clients convert a portion of these savings into a retirement paycheck guaranteed to last for life. Some in-plan annuities are designed to help Manage market risk, such as Nationwide Indexed Principal ProtectionSM, a new in-plan FIA that can provide the potential for growth based on the return of a market index while also providing principal protection.

In-plan annuities offer many of the same conveniences as any other investment option within a qualified plan. Clients make regular contributions of pre-tax dollars through payroll deductions, with low or no minimum investment requirements, and the benefit of tax-deferred accumulation. When structured like a target date fund, in-plan annuities can allow younger clients to accumulate more by investing more aggressively, then automatically shift more of their savings into asset protection and income guarantees as they move closer to retirement. Some companies, such as Nationwide, are designing in-plan annuities that offer liquidity and portability without penalties, should a client change jobs and need to move to a new qualified plan.

Awareness and demand for in-plan annuities are growing, especially among younger generations. According to our 2020 Advisor Authority study, two-thirds of both Millennial investors and Gen X investors are likely to incorporate in-plan guarantees within their defined contribution plans, compared to roughly one-fourth of Baby Boomer investors.

Finding Balance Now and for the Year Ahead

As we all work to get back on track this year, the recovery remains uneven at best. And as the pandemic continues to impact the markets, the economy and our daily lives in the months ahead, finding balance is key. In fact, according to Advisor Authority, 92% of investors say that having a financial plan helps them weather tough times, even if they can’t plan for everything. So help your clients make a financial plan that allows them to balance protection and growth—and help them stick to it—to achieve their long-term retirement goals.

Sources / Disclaimers

  • 1

    Jefferson National, “A Strategic Approach To Managing Taxes.” December 2015.

  • 2

    Roger Ibbotson, “Fixed Indexed Annuities: Consider the Alternative.” March 2018.

  • 3

    ORC International, “2018 Market Volatility & Retirement Income Study.” April 2018.

  • The views expressed are not expressly the formal views of Nationwide, but those of the author.
    Neither the company nor its agents or representatives give legal or tax advice. You should consult your attorney or tax adviser for answers to your specific tax and legal questions.

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