Wade D. Pfau is the program director of the Retirement Income Certified Professional® designation and a professor of Retirement Income at The American College of Financial Services, as well as a co-director of the college’s Center for Retirement Income. He is also a principal and director for McLean Asset Management. He holds a doctorate in economics from Princeton University and has published more than sixty peer-reviewed research articles in a wide variety of academic and practitioner journals. He hosts the Retirement Researcher website, is a contributor to Forbes, Advisor Perspectives, and Journal of Financial Planning, and is also an Expert Panelist for the Wall Street Journal. Wade’s newest book is Retirement Planning Guidebook: Navigating the Important Decisions for Retirement Success. He is also the author of the books Safety-First Retirement Planning: An Integrated Approach for a Worry-Free Retirement, How Much Can I Spend in Retirement? A Guide to Investment-Based Retirement Income Strategies and Reverse Mortgages: How to Use Reverse Mortgages to Secure Your Retirement.
He shares some of his expertise in the Q&A with Lincoln below.
What are the challenges people face when it comes to saving for retirement?
The challenges of planning for retirement continue to intensify as the availability of traditional pensions decline, as people continue to live longer, as low interest rates reduce the growth potential for savings and as employment uncertainties make planning harder.
What are some of the biggest risks to retirement savings once someone is in retirement?
Retirees face three main types of risks. The first is longevity. Living a long time is wonderful, but it is also more expensive as retirees have to fund their ongoing budgeted expenses for more and more years. This looms over the other two types of risks. Market risks related to investment volatility, inflation, the risk of spending from portfolio after a market drop and public policy changes. The other risk relates to spending shocks, which are unplanned expenses related to long-term care, health care, helping family members and so forth. Building a retirement plan involves having different strategies to manage all of these types of risk.
People often assume life insurance isn’t needed in retirement or after the kids have grown, but in actuality, life insurance can play an important role as part of a retirement income plan. How does life insurance fit in?
It’s true. People often assume that life insurance coverage is only needed during working years and that there are only benefits paid when the covered person passes away. However, there are also living benefits that can be very valuable during retirement years. One of those benefits is the access to cash values to supplement retirement income. If the life insurance policy is structured properly, those values are accessed tax free and are not reportable as income. Most modern life insurance policies also include long-term care (LTC) riders that can be added for an additional charge. If the individual experiences a long-term care event, cash can be accessed from the life insurance policy to cover those expenses.
Variable Universal Life and Indexed Universal Life are types of permanent life insurance products that can potentially help clients with retirement income planning? Can you explain the differences in the products, and for whom each might be best suited?
These types of universal life insurance provide different options related to how the underlying assets can seek market upside. Variable policies allow for investments in subaccounts that include stock and bond investments much like a brokerage account. An indexed policy allows for some participation in market upside as well as principal protection of the assets during market downturns. Individuals have flexibility about investment options for each, so there is not just one answer about for whom they may be best suited. But as a general point, those who seek greater exposure to market risk by accepting more downside risk for greater upside potential may prefer variable options, while indexed options may be suitable for those seeking greater control over their risk exposures.