Annuities

Safety in Numbers: 3 Reasons to Stop Running with the Crowd


Annuities

When we have a market correction – and we will have one sooner or later – many investors will run to banks and place their assets in money market accounts or certificates of deposit. While those are traditional safe havens for many people, they tend to only be temporary. Once the markets start rising again, investors leave their safe havens to take on more risk. 

 

We need to rethink why we do those transactions and if it’s worth the effort to complete the run to safety. Instead, why not think about proper allocation for a risk tolerance that probably can’t stomach the full amount risk that’s being taken. 

 

As the old saying goes …

 

You never know how much risk to take until you take too much.

 

Rethinking Risk Strategies

A temporary shift in risk management does very little for clients in the long run. There are several reasons, but here are three. 

 

  • Money markets and CDs earn historically low interest rates compared to instruments like annuities. Today, the average annuity is earning 200 to 250 bps more for A-rated carriers on a five-year product. Now, liquidity is not equal as bank accounts are generally liquid while CDs have some type of penalty if not held to maturity. Annuities provide liquidity in emergencies and limited free withdrawals. Remember, we are talking about rethinking allocations to avoid the temporary run toward safety. In a new allocation strategy, liquidity would likely come from other assets first. 

 

  • Taxation favors annuities. Even during the high tax rates and high inflation/return periods of the late ’70s and early ’80s, tax-deferred assets outperformed their taxable counterparts. Not only in return, but mainly in real return – after tax, inflation and fees. 

 

  • There is a common misconception that money market accounts can’t lose money. In fact, they do fluctuate in value and can go below their targeted one dollar valuation. With many annuities, the client receives a guarantee of principal plus a minimum interest rate return. 

 

So, safety can come in many forms. The most popular are bank instruments, which serve a great purpose. However, the numbers point toward a better solution: better nominal and real rates of return, lower tax rates, and more stable values. Add in the fact that charges are not paid upfront and only when you do not hold the asset to maturity. This makes the purchase efficient from a cost perspective, an effective way to increase yields on conservative vehicles, and provide confidence to the client by showing them a more stable valuation of their conservative asset selection.  

 

Winning Strategies

Don’t follow the leader or the crowd when the market corrects. Rethink your current allocation strategies and look at the real returns to help clients protect their wealth the most efficient way possible. 

 

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.”

Annuities Market Risk Market Correction

Why Longevity is a Crucial Factor in Retirement Planning


Annuities

Longevity can mean different things to different people. We want to think that it signifies a long life, an active lifestyle, and remaining relevant in our communities as we age. Reality has a different take on longevity. For many Americans, longevity remains an unknown risk with unknown costs. 

 

Longevity creates a spending “smile.” Here’s how it looks:

  • Retirees start out their golden years traveling and visiting with family and friends – enjoying their retirement. 
  • Often, they begin to slow down. Rarely is it because they want to. Instead, their energy levels and health begin to take a front seat to their vision of retirement. They stay home more frequently and follow a routine. 
  • Finally, in too many situations, their health deteriorates to a point they need additional care services. The retirement that they planned for – both figuratively and financially – is off course, and there is little chance of pulling it back. 

 

Risks are all over the place during retirement. A growing number of Americans need extended care, either at home or in a facility, which costs thousands on a monthly basis. Our savings rate continues to decline, placing pressure on whether our clients will run out of income during retirement. General health care expenses remain an unknown and a topic which is surely going to change several times during a retirement span. Simply put, we cannot ignore the risks of living too long. 

 

Start Talking

As planners, we owe it to our clients to have a conversation about longevity. By planning ahead, you give your clients options that can’t be offered at the time of the need. Risks can be mitigated using guaranteed income, shifting the risk to an insurance product, or through proper distribution planning.

 

It’s easy to simply apply a distribution percentage and assume a rate of return. That’s why we have software – to do the easy stuff. But, our value can’t be brought down to the level of a software package. Our value as planners is to think critically about our client’s situation and help them meet challenges – those they are aware of and those that are not present today. That requires making sure there is enough income to meet the demands of longevity. 

 

We have to make sure our clients can transition from accumulation to distribution. The rules are dramatically different for these phases of life. Take the time to discuss the client’s vision of retirement, the duration, the standard of living, and potential risks that might get in the way. Hit those risks head on. It will provide confidence and peace of mind to your client. And, at the end of the day, that is one of your largest value propositions to your clients and prospects. 

 

Winning Strategy

Longevity means a lot of different things. Make sure you have a clear picture of what longevity is and what risks come into play. Hitting those risks head on can mean the difference between success and failure for many Americans in retirement. 

 

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.”

Long-Term Care Longevity Retirement

Turning Tax-Deferred Into Tax-Free


Annuities

One of our most successful webinars this year featured two ideas for turning tax-deferred income into tax-free benefits. (If you missed it, you can watch the webinar replay here.) It’s easy to understand the excitement around the topic as there is a large, blue ocean of opportunity for financial advisors who focus on non-qualified annuity sales and the industry’s book of business. 

 

According to the 2016 LIMRA Fact Book, there are approximately $468 billion dollars of non-qualified, tax-deferred annuities in the United States. These contracts aren’t being used for annuitized, lifetime income. When you peel back the onion, you’ll see 31 percent of those contract holders are older than 75, and 68 percent are classified as affluent, high net worth, or mega-millionaires by LIMRA. That pairs the industry down to about $100 billion of annuities with a tax-deferred explosion ready to happen at death of the owner.

 

With long-term care as a huge risk in the longevity plan for retirement, it’s important to consider options for those annuities. Those idle assets are no longer need for their original purpose: income. Instead, they are being conserved and protected to be passed on to the next generation. 

 

A Better Way

Using a tax-free exchange under IRC Section 1035, the client may exchange the old annuity for a linked-benefit annuity. This transfer benefits the client in several ways:

 

  • The new product captures all the gain in the old policy. If the old annuity was connected to variable sub accounts, now might be a good time to “lock in” those gains using a fixed contract like a linked benefit annuity. 
  • Clients gain leverage on the policy’s value if used for long-term care expenses. For a 65-year-old, a $100,000 policy value may create a pool of long-term care benefits of $250,000 or more. This translates to transferring $1 and getting $2.50 when used for long-term care. You create tremendous leverage through this transfer. 
  • If the old policy had tax-deferred gains built in, those gains are transferred and continue to grow on a tax-deferred basis. If the contract is used for qualified long-term care expense, all the proceeds – the cost basis and the gain – are received tax-free. 

 

Look at your client’s balance sheet and the current purpose of certain assets. A lot of them aren’t being used for their original intent. Now is a great opportunity to repurpose those assets and create leverage and value in the planning process. 

 

Winning Strategy

Look to turn tax-deferred income into tax-free benefits. Repurposing assets that are no longer meeting client goals is a great way to add value to your relationship. By looking at old annuities, you may be able to reduce the tax burden of certain assets to the client and their beneficiaries.  

 

1LIMRA, Fact Book on Retirement Income 2016: https://www.limra.com/bookstore/item_details.aspx?sku=23518-001

  

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.”

Long-Term Care Longevity Retirement

Non-Insurance Options for Long-Term Care Risk


Annuities

Most clients wait too long before addressing longevity and long-term care. They reach a point in their lives when it becomes apparent that they will need care, or people around them need care. Unfortunately, at that point, many find the cost of transferring this risk to an insurance company is unaffordable. That’s when I think you should devote more resources to the problem. 

 

I realize many Americans have not planned enough to feel secure about their retirement, let alone a long-term care event. But, these concerns can be mitigated through the use of guaranteed income strategies. As I’ve said before, long-term care is as much of a cash flow issue as it is an insurance or capital issue. 

 

There are many options available to most consumers that are free of underwriting or have reduced underwriting. Annuities provide alternatives to income that are free of medical underwriting yet must meet best-interest standards for clients. These vehicles provide tax-efficient income, longevity protection through lifetime income, and the ability to hedge the cash-flow increase due to health concerns. 

 

  • Income riders allow a client to produce guaranteed minimum levels of income, which can be withdrawn when they need it the most – at the time of a care event. Otherwise, the asset continues to grow tax-deferred, which allows for the account value to grow faster than a normal non-qualified asset.  

 

  • Deferred income products can allow flexibility in the timing of the disbursement so that your client may turn on the income at a specific period or range of time.

 

  • Exclusion ratios can allow for part of the income to be returned to the client tax-free – it’s a return of their original basis in the contract. By having some of their income on a tax-free basis, the client may not have to erode as much of their account balance. 

 

Guaranteed income can play an important role in mitigating long-term care expenses, especially for the uninsurable or those that who afford to shift their risk to an insurer. When you have a client declined for coverage or rated to a point where they will not accept the offer, don’t let the risk go unaddressed. Take the initiative to position guaranteed income in the proper light and reduce the cash flow risk. 

 

Winning Strategy

Guaranteed income not only helps with retirement income, but it can also reduce the risks of long-term care expenses. Don’t ignore the risks of clients who can’t be covered through insurance. 

 

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.”

Long-Term Care Longevity Retirement

Why You Shouldn’t Wait to Plan for Long-Term Care


Annuities

Aside from running out of money, a long-term care event may be the largest threat your client’s retirement plan. An extended care event can devastate a balance sheet and family’s cash flow. More importantly, it adds unnecessary stress for the retiree, their caregiver and their family. 

 

I’m not suggesting that everyone go out and buy long-term care insurance. Although insurance is the best risk-transfer agent ever developed for situations like this, the reality is not everyone can afford or have access to the proper risk mitigation. But, that doesn’t mean you can’t have a reasonable plan. What’s important is that everyone is on the same page and the individual gains the best care possible. 

 

So many times, we get calls for placing assets in other names or entities in an effort to qualify for Medicaid. While that is an effective strategy, I think you need to keep you clients in the front of your mind and provide the best possible care. You need a plan to do that. Planning doesn’t hold value when it’s time to execute. Planning hold value when you maximize options. You can only do that BEFORE the time of need. 

 

Ask Questions, Find Answers

Talking to your clients about long-term care risk requires a holistic view. Many of our inbound calls possess transactional level detail about a client. In order to serve the client best, advisors need to dig deeper than the balance sheet. 

 

You have to ask: 

  • What level of care does the client want in the event of a short-term or long-term event?
  • If there is a chronic diagnosis, what type of care can the family caregiver provide and up to what point?
  • Where does the client want to live? (This is one of the most under-discussed aspects of retirement and longevity planning.)
  • Which assets can be used most effectively now and at the time of the care event? 

 

There are avenues that can alleviate the retention of longevity risks like long-term care. Home equity conversion mortgages provide access to tax-free funds based on the value of the home, annuities and income riders create cash flow as well as increases in cash flow for long-term care, and housing facilities can provide a lifetime estate. 

 

Obviously, transferring the entire risk to an insurance company provides the best protection, but chances are that all of your clients will need an alternative plan. Planning can make a difference, even just a few years prior to a care event. So, talk to your clients about deploying some of their assets to address a risk that might devastate their plan in the future. 

 

Winning Strategy

Planning doesn’t hold any value at time of execution. Planning adds value when you maximize options. Look at the options now, before your client needs extended care. Address one of the largest risks that can devastate a retiree’s plan and transfer the risk as much as possible. 

 

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.”

 

Long-Term Care Longevity Retirement