Annuities

Guaranteed Income and Success


Annuities

Over the past four and a half years, my firm has been working on a software tool to help Americans think and act differently in preparation for retirement. JourneyGuide  helps identify how a client will meet their spending needs on an after-tax, after-inflation basis. It’s fast, accurate, and it allows you to work with your client not just for your client. 

 

Important findings have been coming out of the software for some time. I find the most important aspect revolves around guaranteed income and the positive effects it has on the portfolio. 

 

Earlier this year, we released a study on Qualified Longevity Annuity Contracts (QLACs) which proves they improve the probability of success in retirement portfolios.1 After a QLAC was added, many of the scenarios we tested increased to more than 90 percent probability of having $1 in the portfolio at age 95. What surprised me the most was that the largest improvements were for younger ages (ages 55-60) and more conservative clients. We often think of the traditional income annuity buyer as being 65-plus. This study clearly shows that placing an annuity with younger ages is beneficial. 

 

Any Guaranteed Income is Good

However, it’s not just deferred (QLAC) or immediate income annuities that improve outcomes. The power of guaranteed income is demonstrated case after case. The ability to provide income that the client will always receive is a powerful story. Purchasing the income and allowing the rest of the portfolio to generate less accomplishes two things:

  • It takes pressure of the portfolio to sustain a high withdrawal strategy 
  • It allows the portfolio to be invested with a long-term focus instead of short-term gains for income

 

These findings work regardless of income now or income later. The ability to take pressure off the portfolio allows the client to invest longer term, which might provide additional tax relief in the form of long-term capital gains versus ordinary income. Guaranteed income can be found in Social Security, defined benefit income payments or commercially purchased annuities. Those are the only vehicles that support mortality credits and provide income for as long as the client lives. 

 

Winning Strategy

Go to www.journeyguideplanning.com and request your free demonstration of JourneyGuide. I think you will find the tool can change how your clients think and act in retirement. 

 

About the Author

Mike McGlothlin is a team leader, retirement industry activist and disciple of Indiana Hoosier basketball. In addition to being EVP of retirement at Ash Brokerage, he is a sought-after writer and speaker. His web series, “Winning Strategies,” provides insight and motivation for financial advisors in many forms – blogs, books, videos, podcasts and more. You can get his latest book, “Winning Strategies: The New Rules of Retirement Planning,” on Amazon.

 

1Ash Brokerage, “QLACS Improve Probability of Retirement Success,” 2018: https://goo.gl/Vw9Htz

QLAC Qualified Longevity Annuity Contracts Guaranteed Income Retirement Planning Annuities

The Hidden Impact of QLACs


Annuities

Soon after Qualified Longevity Annuity Contracts (QLACs) were created in 2014, we put them to the test in a vigorous study. And, we’ve repeated that study every year since. 

 

Here’s what we’ve learned: While QLACs continue to offer an incentive for pushing required minimum distributions (RMDs) out to age 85 and one month, there are other benefits to consider. In every year that we’ve done the study, a few key takeaways have remained consistent. 

 

  • QLACs improve retirement outcomes. In our 2018 study, we applied QLACs to four different traditional asset allocation strategies in four different age groups, using market projections from 35 investment advisors. Amazingly, a QLAC improved the probability of success in 100 percent of the scenarios we tested.1 In our earlier studies, when we used past performance of the S&P 500 and Barclay’s Aggregate Bond Index, QLACs improved the probability of success in 95 percent of scenarios. Regardless of projected or past performance, the placement of a QLAC has proven to be a great enhancement in nearly every asset allocation plan. 

 

  • Younger, more conservative clients benefit the most. In our analysis, the largest improvements have been in younger and more conservative client scenarios. We see significant improvements when a QLAC is placed at age 55 or 60 with an asset allocation of conservative and moderate-conservative. Too often, we look at QLACs as a tool to simply push RMDs down the road. But guaranteed income, i.e., not running out of money in retirement, is the bigger story. We often overlook the benefits of guaranteed income in portfolios and this study proves the positive impact.

 

  • Guaranteed income changes the conversation. If you’re not already looking at the value of QLACs – or other guaranteed income products – then you’re doing yourself a disservice. With our JourneyGuide™  software, we’ve discovered that guaranteed income not only changes the mathematical outcome of retirement, but it also changes your client relationships. With a tool like JourneyGuide, you can have meaningful, interactive planning sessions to show clients the positive impacts that small changes can have on their portfolios. In many instances, the implementation of guaranteed income allows the client to be more aggressive with their other assets. This adds advisor gamma to the relationship that would otherwise be lost. 

 

Winning Strategy

The hidden value of QLACs is guaranteed income. We’ve proven that regardless of allocation, the impact of guaranteed income is significant – even more so with younger investors. I encourage everyone to look at your younger clients and begin placing guaranteed future income in their portfolios. That will, in turn, allow you to have a conversation around their remaining assets or capture more assets and invest them more aggressively to maximize long-term growth potential. 

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About the Author

Mike McGlothlin is a team leader, retirement industry activist and disciple of Indiana Hoosier basketball. In addition to being EVP of retirement at Ash Brokerage, he is a sought-after writer and speaker. His web series, “Winning Strategies,” provides insight and motivation for financial advisors in many forms – blogs, books, videos, podcasts and more. You can get his latest book, “Winning Strategies: The New Rules of Retirement Planning,” on Amazon. 

 

1Ash Brokerage, “2018 Study: QLACS Improve Probability of Retirement Success,” March 2018: http://bit.ly/2jN5a2K

QLAC Qualified Longevity Annuity Contract Retirement JourneyGuide

Tax Control and Longevity Risk: Retirement Strategies Worth a Conversation


Annuities

As I have talked with clients and advisors over the last six weeks, there is renewed optimism revolving around our economy. I share the same view and have shared it for some time. I listened to a chief economist for an insurance carrier the last week of January. They had been lobbying for tax cuts for several years. It seems like the additional cash flow to corporations helps everyone’s view and, possibly, company financials. 

 

Risks of the Unknown

Tax control is really important in retirement planning. So much of our clients’ savings is tied to qualified plans, either in company-provided retirement plans or individually owned IRAs. Many of these IRAs are funded with former employer-owned retirement plans as well. So, the tax status of these funds makes it difficult to plan for tax control at retirement. Generally, Roth options were not available in qualified plans until recently, so the majority of assets in these plans become fully taxable. 

 

That’s why proper use of nonqualified assets can come into play. It’s important to consider taxes when making the plan. Even more important is the fact that longevity will put additional pressure on the taxation of the income as we age. Many income riders provide guaranteed income, but the income becomes fully taxable when the account value reaches zero. As longevity risks increase, nonqualified income can offset the impact of taxes later in life. 

 

Once we hit life expectancy, the need for medical coverage and long-term care increases. With means-tested medical premiums, it will become critical to make sure we provide clients the lowest possible premium for their health care. The use of nonqualified income can reduce the tax burden on income and lower the means-tested income levels. 

 

Take Control

You can control taxes and address longevity in multiple ways. Look toward innovate planning techniques and tools to help the client protect their income and tax advantage of tax benefits and thresholds to maximize net income. Below are some ideas you should consider when evaluating tax control and opportunities with your clients:

 

  • Look to convert Traditional IRAs to Roth IRAs in the lower tax rate environment. This current tax payment allows the client to access funds tax free later with more distribution control (no required distributions at age 70 ½). The tax-free access can help keep them under a certain threshold for means-tested premiums or benefits. 
  • Consider using Home Equity Conversion Mortgages (HECMs) to the shift some longevity risks. HECM lines of credit give clients tax-free access to large sums of capital based on the value of their home. New rules allow the client to stay in their home through nonrecourse loans, irrespective of the future value of the home. 
  • Use nonqualified single premium annuities to maximize Social Security income payments by pushing the election date to age 70. Over 20 years, this can increase Social Security income by $122,000.
  • Hedge longevity risks with nonqualified deferred income annuities. The exclusion ratio of DIAs can provide tax relief while supplying income later in life. 

 

There are many more ways to control taxes while addressing longevity. Take a look at how guaranteed income and HECM options allow you to have a more meaningful conversation with your clients. With more options, the client can rest easier knowing you have their best interests in mind. 

 

Winning Strategy

You have to consider the tax effects now (and in the future) of the decisions that your clients make for retirement. Down the line, tax control becomes important as you rely more on rider income. And, as means testing becomes more prevalent, tax thresholds will be a critical success factor to any retirement plan. 

 

About the Author

Mike McGlothlin is a tireless advocate for the retirement planning industry. As executive vice president of retirement at Ash Brokerage, he heads a team providing income planning solutions focused on longevity and efficiency. He’s also a thought leader who provides guidance and assistance for advisors and broker-dealers navigating marketplace and regulatory changes. You can find a collection of his blog posts in his book, “Above the Clouds … Winning Strategies from 30,000 Feet.”

Retirement Tax Control Home Equity Conversion Mortgages Longevity

The First Five Minutes: How to Set a Positive Tone for Your Entire Year


Annuities

No matter the sport, there are a few critical points in every game when coaches focus on motivating their team. Obviously, finishing the game strong is a must – you have to execute down the stretch and perform in pressure situations. 

 

However, coaches also talk about the first five minutes of each half as being critical to success. The first five minutes set the tone, allow the team to put pressure on the opponent, and energize (or take out) the crowd.

 

As we begin 2018, I think the first five minutes of your year are important for the same reasons. You have to set the tone for your clients, relieve them of the pressures of retirement income planning, and take out some of the risks of retirement, namely longevity issues. Each has a specific purpose in helping your clients feel more confident in their long-term retirement strategy. And, by focusing on your clients’ needs, you add tremendous value to their lives. 

 

  • What are some events that might derail your clients’ retirement today?
  • If you could reduce that risk, how much value would your client feel you delivered?

 

Set the Tone

Could a correction happen in 2018 or 2019? Are your clients going to be able to time the market to avoid an eventual correction? With today’s rising equity markets, it’s hard to take investments out of the market. 

 

We have a tendency to maximize the returns for our clients each and every year. However, as they age, return is less important to many as their focus turns to income versus accumulation. Our clients fear they will not have enough income in retirement, and our response is mistakenly to accumulate more assets. In reality, we have to protect their asset base and help them generate more income. 

 

Lock in Gains

Our clients have accumulated trillions of dollars of assets in qualified plans, including their personal IRAs. The current tax law allows for qualified transfers from one IRA to another rollover IRA with no current tax as long as it meets the transfer criteria, i.e., direct trustee-to-trustee transfer. 

 

By using conservative vehicles to sweep gains from their account, the client can take investment risk off the table while earning a competitive, conservative return. In many cases, the client can still earn indexing credits tied to their favorite equity or blended allocation index up to 5 or 6 percent (current pricing as of this blog). If the client sweeps the gain from their mutual fund or accumulation-based variable annuity, they have “locked in” the gains from the previous bull run.

 

If the markets continue to increase, they can participate in some of the equity returns up to the stated maximum cap or participation rate. But, they will not lose the gains they have been building. 

 

Your clients will enjoy knowing that if a market correction comes in 2018, you have protected their gains and positioned them for success. A 20 percent correction may take years to recover, and many of our trailing baby boomer clients (age 50-59) cannot afford a dip in their assets just prior to retirement.  

 

Winning Strategy

Locking in gains from the recent long bull run allows you to set a positive tone for your clients in 2018. It takes pressure off their decision of when to exit the stock market by still being able to participate in equity indexing, and you can maintain positive momentum for income in the event of a market correction. 

 

About the Author

Mike McGlothlin is a tireless advocate for the retirement planning industry. As executive vice president of retirement at Ash Brokerage, he heads a team providing income planning solutions focused on longevity and efficiency. He’s also a thought leader who provides guidance and assistance for advisors and broker-dealers navigating marketplace and regulatory changes. You can find a collection of his blog posts in his book, “Above the Clouds … Winning Strategies from 30,000 Feet.”

Retirement Longevity Annuities

How You Can Find Safety in Guaranteed Income


Annuities

Our headquarters is at the heart of Fort Wayne, Indiana, a city that was severely hurt by the downturn of the automobile and manufacturing sectors. But today, it’s seeing a resurgence, especially downtown. Our building, the Ash Skyline Plaza, is about 18 months old, and 15-story complex, Skyline Tower, is being built adjacent to us – just across the rooftop park. 

 

I can see all the construction activity from my office – many times, I have to turn and look away so I can concentrate. There’s nothing like a portable toilet flying up on a crane to make you lose your train of thought. 

 

But, I admire those workers. They’re on site before I arrive and still there long after I leave, even on the weekends. It’s tough work, for sure. And, it’s dangerous, plain and simple. But the crew members all wear safety harnesses, hard hats and boots to protect themselves. It’s part of their everyday habits. 

 

That makes me think … 

 

What safety habits are you instilling in your clients?

 

As they build their portfolios and retirement income, your clients are taking risks. Many of those risks are associated with longevity or outliving their income: 

  • Market returns
  • Sequence of returns
  • Inflation
  • Long-term care events
  • Legacy planning constraints 
  • Taxes

 

Regardless of what happens with all those risks, the safety harness is income. As long as a client has income, they will likely feel more comfortable, regardless of what risks arise. Now, those risks still have to be addressed. But, if your client can feel confident that their income is secure from market drops and inflation, you have a good chance at addressing the other risks. 

 

We have to instill safe habits when it comes to retirement income planning. Nearly everyone can benefit from having guaranteed income as part of their retirement plan. Whether it’s from defined benefit plans, Social Security or insurance company annuities, guaranteed income shifts the risks of longevity. However, only one of those sources has embedded inflation protection, so you must address inflation with your client. Income serves as a great safety harness for those taking investment risks. 

 

Winning Strategy

Focus on the risks that longevity creates for your clients. If you address their fears and concerns, you are likely to win a client for life, as well as many quality referrals. 

 

About the Author

Mike McGlothlin is a tireless advocate for the retirement planning industry. As executive vice president of retirement at Ash Brokerage, he heads a team providing income planning solutions focused on longevity and efficiency. He’s also a thought leader who provides guidance and assistance for advisors and broker-dealers navigating marketplace and regulatory changes. You can find a collection of his blog posts in his book, “Above the Clouds … Winning Strategies from 30,000 Feet.”

Retirement Guaranteed Income Longevity