Never has the need for retirement planning been as great as it is today. Traditional sources of income such as Social Security and pensions will fail to meet the spending needs of future retirees.These factors portend a market of investors that will increasingly demand advice and guidance on the complexities inherent in retirement income planning.

Insurers cannot lose sight of the future. They must prepare today to play a pivotal role in the retirement income market by offering products and services to help advisors and their clients navigate this complicated period of the investor's lifecycle.

Essential products

The insurance industry offers essential products to satisfy four basic financial needs in retirement: cash management, lifestyle protection, wealth transfer, and inflation protection.

* Cash management. Cash management in retirement involves multiple calculations that take into consideration personal savings, Social Security, pensions, and projected spending-assessing the asset and liability sides of a balance sheet.

To address cash management needs and fund premiums for lifestyle protection, insurers offer products such as fixed and variable income annuities. They also offer systematic withdrawals of earnings from accumulation products such as mutual funds and separately managed accounts.

* Lifestyle protection. It is necessary for investors and their advisors to arrange a retirement plan that offers protection against unplanned events and builds a fund for planned spending needs. For example, one objective may be to create a pool of liquid assets in savings accounts, money market funds, or certificates of deposit to support 12 months of spending. Another objective might be to create savings for leisure activities.

In a different individual's plan, the goal may be to use a portion of income to pay insurance premiums for long-term care insurance to protect against health care costs, or to pay life insurance premiums for wealth transfer.

* Wealth transfer. Asset preservation, asset growth, and inflation protection are necessary if retired investors are to meet their goals for wealth transfer, estate preservation and charitable giving. However, a keen balance must be struck between funding retirement income for an unknown duration and leaving a legacy at death. Life insurance products and charitable annuities can be important tools to manage these aspects of the retirement plan.

* Inflation protection and growth. Retirement income portfolios must hedge against inflation to preserve principal investments. Products such as equities, mutual funds, and separately managed accounts typically provide the necessary diversity to forecast long-term growth. These investments are very similar to those used in the accumulation period of a customer's investment lifecycle.

A complex challenge

Retirement income planning is complex, and it is difficult for insurers to educate advisors on the subtle nuances. This is further complicated by the fact that most advisors have yet to recognize that their clients need retirement income planning advice and guidance.

Consequently, it's a challenge for insurers to distribute the products and services that support this area of investment. Simply underlining the benefits of an income annuity with a cash flow illustration won't promote income annuities in today's environment.

Therefore, insurers need to develop marketing materials, calculation tools, and strong wholesaling support to foster education and promote the use of income annuities in a retirement income plan. And, advisors need support from insurers to easily bundle investment products for retirement income planning.

For example, a turnkey marketing kit can attend to a retiree's concern about cash management, lifestyle protection, wealth transfer, and inflation protection. Calculation tools can assist the advisor through the retirement income planning steps.

The final portfolio may include a portion of assets allocated to an income annuity to create a steady stream of income that fills the bank account and offsets spending needs, with a portion of the proceeds paying for long-term care and life insurance premiums.

The balance of the portfolio could be invested in a diversified set of mutual funds.

Packaging educational materials and calculation tools is imperative so that the sales process is easy to understand for both advisors and their customers.

Complexities exist in the sales process, but little is being done today to prepare advisors for this eventual shift of predominance from asset accumulation advice to retirement income advice.

Insurers' strength in manufacturing and distributing accumulation annuities must translate to the retirement income market and the suite of products that they have to offer.

Those insurers that are able to invest in the market of the future and continue to maintain operational efficiency are likely to prevail.

Cynthia Saccocia is a senior analyst in the insurance practice at TowerGroup, a Needham, Mass.-based research and advisory services firm.

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