Annuities

Why Your Digital Assets Will Outlast Your Retirement


Annuities

In the insurance industry, we spend a lot of time working to make sure that our clients don’t run out of money in retirement. We talk with our clients about their assets. Then we plan around them.

But longevity creates other assets that aren't always part of the planning process – digital assets. The longer we live, the larger the digital footprint we leave behind.

It’s both an asset and a risk – and few planners are talking about this risk with their clients.

I recently attended the Society of Financial Service Professionals 2019 FSP Institute. During the conference, an attorney specializing in digital assets talked about common issues with estate planning. Digital assets, he said, usually aren’t properly valued on balance sheets. They’re hard to value because there isn’t really a market.

But digital assets can be monetized if we help our clients think that way. Americans are living longer, and investing patterns are changing. Today’s technologies should be encouraging us to think differently.

First, there are digital assets with tangible value, like cryptocurrency, where individuals assume the risk of safeguarding those assets. One individual lost almost $60 million in assets because their cryptocurrency could not be liquidated in a timely fashion. A little risk mitigation would have gone a long way.

Beyond that, we often hear stories of deceased authors and musicians with memoirs or other works on their computers, locked forever because nobody has their password. What great ideas, what contributions to literature and the arts might never see the light of day? Or even personal memories – photos, videos and documents from a life well-lived. More than ever, this is the legacy individuals want to leave for the next generation.

The insurance industry needs to test the risks and rewards of managing a client’s digital assets. If they haven't already, your clients’ power of attorney or executor should have access to their social media and online financial accounts. Your client will need to give explicit authorization and direction to that person what to do with those accounts if the worst happens. Estate planning documents need to reflect the new world of technology and our reliance on it.

Retirement income planning is more than just a systematic withdrawal. It engulfs the need to have guaranteed income to mitigate longevity. But, it also requires us to look at other risks – health care, long term care, taxes, legacy planning, and now digital assets.

 

Winning Strategy

Consider adding digital assets to your financial planning and retirement discussions. Digital assets will last longer than any of us and our money. Plan to make sure they are controlled and disposed of properly.


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. His latest book, “Free Throw for Financial Professionals,” is available now – learn more at www.freethrowsforpros.com.

Retirement Planning Digital Assets Winning Strategies

Like a Good Wine, It's Complex


Annuities

My wife and I enjoy a good wine. We try to have some with our Friday date night at our local favorite restaurants and recently took a trip to Sonoma County, California, to tour the vineyards. It was nice to spend time with my wife in a place unfrequented by polar vortexes.

I confess I'm fascinated by the craft of wine-making. I wish I had more time to learn about the process. Winemakers manipulate the flavor of the grape, which affects the wine’s taste, aroma and how it feels on your pallet. Much of it relates to climate and environment – how much sun the grape received, the dryness and the quality of the soil.

Some things are more in the winemaker’s control, such as the placement of the vineyard, the type of wine vessels and the length of fermentation. Each of these decisions affects the smell, flavor and taste of the end product.

The complexity of income planning is like a winemaker’s development process. Most people look at their assets as they might look at an ordinary bottle of wine. "Yep," they say. "It’s wine. That’s all I need." But just like a good wine, there are many factors that go into retirement income planning. Some are out of your control, but many are our choice. Just like a good wine, it's up to us to help control the end product.

To create a fine wine, winemakers use different tools. To plan for retirement, you also have to use different tools and strategies.

Asset Location
Award-winning winemakers match grape crops to the optimal soil mixture. We must place our clients’ assets in the proper location to make sure the income is optimal.

Going Beyond Accumulation

Even if you have enough grapes, that does not ensure that you make a bottle of great wine. As planners, we must match our clients’ desires with products that create optimal outcomes for them.

Plan Ahead

The element that makes a great wine takes years to develop. Our clients need to know their options to make an optimal retirement outcome, and that conversation needs to happen early.

Winning Strategy

Think like a winemaker. Use all the tools available. Take all contingencies into consideration when you are developing retirement income strategies. It could mean the difference between a sweet, robust retirement… and vinegar.

 

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. His latest book, “Free Throw for Financial Professionals,” is available now – learn more at www.freethrowsforpros.com.

End of Game Toughness


Annuities

On the side of the 1987 NCAA men’s basketball championship ring, the manufacturers have engraved a word – toughness. During our run to the championship, Indiana University basketball had to come from behind in five out of six tournament games. We were often behind until very late in the game. Two of the games came down to last-second baskets, including the championship.

In the Hollywood version, they might have called us The Comeback Kids. But I’ve never heard the '87 team identified that way. Instead, there was a quiet confidence within the team. No one likes being behind – it requires mental toughness to continue fighting on.

Part of our end-of-game determination was due to months of preparation for the championship. We executed our game plan better than the other team and did it late in the game. We knew the other team’s plays and practiced them for weeks. Those late, game-winning free throws were almost like going through the motions after weeks and weeks of late-game simulations at practice. Our preparedness meant far less late-game stress.

Without practice, we may have had a different outcome. I wrote about about that sinking feeling when a loss is inevitable. It’s like seeing account balances slowly deplete, knowing you are going to lose the retirement game.

Do you have clients anxious about their retirement?

There is no need for stress or anxiety surrounding anyone’s retirement. Their confidence will grow the same way our confidence grew: with repetition. Just as a team runs plays to prepare for games, clients need to run simulations predicting their income many times before they retire.

Retirement planning involves a lot of unknowns. Longevity, healthcare, tax brackets, sequencing of returns and a potential long-term care event are all factors to watch for. If income is a concern, you owe it to your clients to discuss guaranteed income options. These options are better placed early in the planning process versus later at age 70 or beyond. With a plan in place, you can avoid the stress and anxiety of market fluctuations that affect income stability.

 

Winning Strategy

Take the stress out of your client’s end of game decisions. Focus on planning, preparing and putting the client is a position to win today.

 

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. His latest book, “Free Throw for Financial Professionals,” is available now – learn more at www.freethrowsforpros.com.

The Need for New Models


Annuities

Every few years, an economist wins an award for new money management strategies based on an algorithm. To date, many of these models have focused on the general principle of the bell curve. In numeric terms, 95 percent of market returns fall within two standard deviations of the mean.

At the Society of Financial Service Professionals 2019 FSP Institute, the new models focused on the other 5 percent. These returns – outside that bell curve – can be devastating, especially when combined with a longer life expectancy.

Let’s break it down. Managing a client's assets is difficult enough, but longevity breeds uncertainty. We know that clients either need significant assets or a low withdrawal percentage to sustain their retirement income stream. But both of those solutions assume a normal sequencing of returns. If they see significant negative returns, especially early on in retirement, it can devastate a portfolio. And the longer they live, the greater the likelihood they will experience an event outside of the normal bell curve.

Which brings us back to the models. New models, as they should, now include risks that fall outside the typical bell curve. The risk is simply too great to assume our clients will be in the 95 percent. And this risk factor – the unknown – is the main reason we continue talking about guaranteed income:

If a return-based portfolio fails, it is catastrophic. If a portfolio fails with guaranteed income, it is not catastrophic.

As we build client portfolios, we should maintain a deep focus on that 5 percent. The success or failure of our client's portfolio may depend on it. In theory, the odds of a financial crises are rare. The probability of these once-in-a-century events happening while in our retirement years is statistically slim. It all sounds reassuring.

And yet, three have happened in our lifetime. No matter how large or small your client perceives it to be, transferring this risk is critical to the success of retirement income plans. Factoring in the severity of these events will produce a more realistic view of how the portfolio will sustain itself.

In previous blogs, I've discussed the speed of today’s technology and the co-dependency of global economies. Financial markets are complex and can change rapidly. Despite the odds, it makes the risk of another Black Swan type of event very real. If that event comes at the wrong stage of retirement, it could be catastrophic. Timing is everything, and since we can’t predict the future, we must recognize that those returns might happen, then plan for them.

 

Winning Strategy: Look at not only the severity of market events but the timing. Consider the new models to portfolio management in producing income with longevity concerns in mind.

 


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. His latest book, “Free Throw for Financial Professionals,” is available now – learn more at www.freethrowsforpros.com.

 

Financial Models Winning Strategies FSP

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