Annuities

Avoiding Derailment


Annuities

Let me ask you something …

 

What’s the one thing that can completely derail a near-retiree’s plan?

 

Many answers might come to mind. But, I’m willing to bet most of them revolve around the reliability of market returns. Think of your clients’ journey like a train on a long-distance trip – if you’re not careful, you could derail them just before their destination. 

 

Starting Up

As your clients travel through their working years, they sit in the conductor’s seat. Most don’t have a lot of disposable income in the early years – anything they make goes to pay the bills, and not much is left for long-term savings. As they work through their careers, they begin earning more money and committing more to their retirement. The locomotive starts to build steam and momentum. 

 

Slowing Down

Market corrections are inevitable. Your clients’ trains will have to slow down every now and then. But, that’s OK – most plans account for slow-downs, and there’s usually plenty of time to pick up speed. Once assured that the difficulties are behind, you can increase speed and head back on track. Sometimes, you even need to switch to a more aggressive line to make up lost time. 

 

Picking Up Speed

When we continue along a journey with little to no problems, it’s easy to forget about the fundamentals of steering a train. You can easily go too fast around a corner. If you’re not careful, the momentum that you built can work against you. After years of picking up speed, your locomotive and the cars behind it can derail and spin out of control, completely stopping you in your tracks.  

 

Avoiding Derailment

That’s what happens when we have a late-accumulation market correction. All the cars – retirement income, emergency funds, health care payments, long-term care plans – they all go off track of what we planned. The momentum your client has built for 30-plus years is ruined. But, it could all be avoided if we steer them the right way. 

 

You have a lot of clients with their eyes firmly focused on their final destination – retirement. Unfortunately, that means they sometimes take their eyes off the track they’re headed down. You can really make a difference for those clients now and during the distribution phase. You can help conduct the train and get it safely down the tracks. 

 

Winning Strategies

Ash Brokerage answers the complex questions you and your clients have in preparation for retirement. Begin by talking to your clients about the need to be more conservative and avoid the risks that can derail retirement at the end of their journey.  

 

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 Financial Planning Market Risk

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

Fundamental Truths of Chasing Yield and Liquidity


Annuities

I have long discussed the need to position your products and services on value propositions besides rate.  However, I want to talk about the advantages of selling in today’s low rate environment and placing the client in a better position using rate as an example. In the long run, the value you bring to your clients by talking about current fundamentals will bring more people back to your office.

 

As I looked at today’s rates (Sept. 6, 2016), the current 30-year Treasury Yield is 2.24 percent. Currently, several insurance carriers are offering five-year, multi-year guaranteed rate annuities with similar rates. I constantly read in the Wall Street Journal about advisors placing their clients in dividend-paying stocks in order to create better yields in the portfolio. So, in order to obtain higher yields, the client either must take equity risk in the portfolio or expose the bond portion of the portfolio to extreme price depreciation in the event of a rising interest rate market. Neither sounds fundamentally strong for the long haul.

 

Too many advisors fail to show an alternative because of their own biases against annuities or a bad past experience. But, I believe we are in the best-ever market conditions to sell our products. Even with fixed annuity yields between 2.25 percent and 3.34 percent (assuming an FIA hits a 4.5 percent cap 75 percent of the time), our taxable equivalent yield is, at a minimum, 3.84 percent – well above the current investment grade corporate bond yields. And, the nominal return is just as high as the current 30-year Treasury rate, with no risk to principal in an increasing interest rate environment. 

 

So, while your competition searches the next best thing that their clients want to hear or chase, talk to your prospects and clients about two fundamentals: safety and liquidity. Ask yourself:

  • Why wouldn’t your client want to take a 30-year yield with one-sixth of the maturity?
  • And, why wouldn’t the client want to have a more liquid portfolio for the same yield with additional flexibility for emergencies and medical issues? 
  • And, what prevents you from showing this option? Likely, it’s your mindset against a lower interest rate than six months ago.

 

Winning Strategy:

Don’t focus on where the economy or interest rates were six months ago and compare them to today. Look at the relative economic conditions and talk to your clients about fundamentals. They will appreciate the simple, straight-forward approach to their retirement success.

 

About the Author

Mike McGlothlin is a tireless advocate for the retirement planning industry. As executive vice president of annuities 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.”

 

Yield Annuities Rates Economy Market

Looking for the pothole around the corner


Annuities

After the harsh winter of 2014, many streets were left with large and encompassing potholes. In my hometown, the city had to repave a stretch of a major downtown street because it was essentially impassable. With the Farmer’s Almanac predicting an even a worse winter for 2015, we’re already talking about the storms and havoc heading our way. 

Unfortunately, we as financial advisors don’t heed the same warnings, and we’re positioned to repeat the same mistakes of the past. Today, many signs point to a market correction – a potential healthy correction of 10 percent or less. While it appears to be smaller than the financial crisis of 2008-09, it nonetheless will take trillions of dollars from investors. 

Given that our clients are five to six years closer to retirement from last major correction, it should be more imperative to protect their wealth. Unfortunately, I continue to hear advisors satisfied with their clients’ account values and assets under management going up without regard to risk and the opportunity to mitigate those risks.  

With today’s product portfolios, many advisors miss the opportunity to lock in gains from existing accounts, especially retirement accounts. I would estimate that 50 percent of our clients would like to take the gains from the last five years off the table and make sure they don’t repeat the claw back they experienced in 2008-09. 

While fixed annuity returns remain low, the risk associated with a potential market correction would outweigh the loss in account value. Look at your client base. Which ones called you the most or came to you as a new client during the last correction? Talk to them about their interest in taking some of their gains off the table. You’ll be looking out for their potential pothole around the corner.

The Bottom Line: Many clients have recovered from the financial crisis five years ago, and they’d like to protect what they’ve gained. Contact them now to help take those gains off the table.   

 

Annuities Retirement Market