Annuities

Why Your Clients Can’t Live With 2 Percent


Annuities

Many people say they can’t take a 2 percent return on their money. This was especially true after the financial crisis and the aggressive monetary policy in the United States. However, many Americans have felt that 2 percent was a good return on vehicles like certificates of deposit or money market accounts. Regardless of your perspective, you can never take 2 percent as a probability of success in your retirement plan.

Well, that’s exactly what you might find for many Americans. With just one, three-year long-term care event during retirement, an otherwise successful plan could be wiped out. In fact, we have several case studies that show the impact of a long-term care event on a retirement portfolio. All are devastating to the probability of success, regardless of market performance.

We find that many people who use Social Security properly and have saved a comfortable nest egg can generally retire at or close to their spending levels. That’s not to say that annuities can increase the probability of success to higher levels, but most Americans aren’t too far off their goals with a few solutions, not sacrifices.

However, if we factor in a long-term care event, that dramatically changes the client’s chances of success. In many cases, the probability of success drops from 85-95 percent down to just 2 percent for a healthy spouse. A client can feel comfortable with 85 percent, but not 2 percent.

The solution is properly planning for long-term care through by shifting the risk to an insurance carrier. The additional capital or cash flow rarely replenishes the probability of success to the full 95 percent; however, it typically moves the number back to 70-80 percent. We commonly hear, “I can live with 70 percent, but I can’t live with 2 percent.”

Many people have been comfortable living with 2 percent for a rate of return. Unfortunately, when you show them 2 percent probability of success, they lose nearly all comfort and confidence. Make sure you provide an appropriate probability of success to your clients’ retirement plans by addressing the risk of long-term care.

 

Winning Strategy

Talk about long-term care. Ask questions. It could mean the difference between a success rate of 95 percent or 2 percent.

Winning Strategies

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Catch the latest Winning Strategies video where Mike dives into risks in retirement!

One of the largest risks in retirement is a long-term care event.Mike shares two winning strategies you can implement as an advisor to help clients make it through retirement with confidence.

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

Retirement Winning Strategies LTC Social Security

3 Ways to Protect Against Inflation in Retirement


Annuities

More Americans are living to age 100 than ever before and the number continues to grow. If you are looking at separating yourself from the competition, you must address the impact of inflation on both income and assets for your retirees.

Some people consider inflation to be the cruelest tax of all. It slowly eats away at the value of the dollar over time. Most people don’t feel it year-by-year. But at some point in the future, the client will wake up and say they can’t afford the same things they did at the beginning of retirement. That’s on us.

One of the best strategies to protect income erosion is to maximize guaranteed income streams that have inflation protection. Below are a few examples.

  1. Social Security – This income stream has a built-in inflation hedge with annual increases tied to an index reflecting consumer price increases. If you position Social Security correctly, and leverage its growth past Full Retirement Age, the higher income grows with the index. This provides a higher likelihood that the retiree will be able to afford the same things in 20 years that they do today.
  1. Guaranteed Income Annuities – With any asset that you control, you can leverage the power of guaranteed income options available on some annuities. It’s important to realize that any person should limit the amount of funds that go into annuities to the proper allocation. If too much of a person’s assets go into a conservative vehicle like annuities, it can actually decrease the probability of retirement success.
  1. Inflation Riders – Several income riders can provide increases tied to the underlying index. Single-premium annuities have options for a guaranteed 3-5 percent inflation adjustment. You need to understand the client’s risk tolerance before deciding which solution is appropriate for them. Maintaining control is an important aspect with many clients that should not be overlooked.

Regardless of the solution you provide for inflation, make sure you don’t make your client sacrifice their standard of living due to loss of buying power.

 

Winning Strategies

Protect clients from inflation. Make sure not only their assets but also the income streams increase with inflation during retirement.

Winning Strategies

Craving More?

Catch the latest Winning Strategies video where Mike dives into risks in retirement!

One of the largest risks in retirement is a long-term care event.Mike shares two winning strategies you can implement as an advisor to help clients make it through retirement with confidence.

Watch Now!

 

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 Inflation Annuities Mike McGlothlin Social Security Guaranteed Income Annuities

3 Reasons You Need to Talk About Guaranteed Retirement Income


Annuities

This blog is meant to educate, motivate and inspire advisors to look at retirement income planning in a different way. Retirement can’t be discussed with a client without involving some type of guaranteed income – Social Security, defined benefit plans or commercially purchased annuities. All have the same basic components, but it’s critically important to have an income discussion with clients as early as possible. Here are three reasons why: 

 

1. Social Security planning and integration is rapidly becoming an important topic for many Americans. Recent surveys indicate that the majority of clients will seek out another financial planner if their current planner is not talking about Social Security integration.1 In and of itself, Social Security is nothing more than a public annuity. You place funds into the system for a guaranteed income that you can’t outlive. So, no one should be uninformed about annuities because many people’s main source of retirement income is an annuity called Social Security. 

 

2. At the close of 2017, the S&P 1500 Pension Index stood at 84 percent.2 That means the average pension plan is only 84 percent funded. Pension risk transfers continue to grow. (See my March 2018 posts on pension risk transfers for more information.) Transferring the liabilities of a defined benefit plan typically requires the use of a group annuity – a promise to pay the plan participants for the rest of their lives according to the plan document. Today, insurers are in a much better position than pension administrators to manage longevity risks. We are moving into a more volatile market situation while longevity for 70-year-olds grows. Those are two risks where plans can ill afford to miss the mark. 

 

3. Finally, our research through our JourneyGuide™ planning team finds that guaranteed income sources increase the probability of success by large margins. By placing 15-25 percent of a retirement portfolio in guaranteed income sources, a large segment of the population will have a better chance of having at least $1 remaining in the portfolio at age 95 (or whenever they select). Please go to www.journeyguideplanning.com for your free 14-day trial of the software tool and schedule a one-hour training session to learn how your clients can benefit from the proper placement of annuities. 

 

Annuity Awareness Month gives you a chance to talk about annuities with your clients. Think about how comfortable your clients are with the annuities they already have – even if they may not realize it. I think it will provide a great comfort level. 

 

Winning Strategy

Take a step back and talk to your clients about the annuities they likely own now – Social Security and pension plans. Knowing they already have guaranteed income sources might make them feel better about placing annuities in their portfolio.

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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. 

 

1Nationwide Retirement Institute, Social Security 4th Annual Consumer Survey, September 2017: https://nationwidefinancial.com/media/pdf/NFM-16735AO.pdf

 

2Mercer, “S&P 1500 Pension Funded Status Increased by Two Percent in 2017”: https://www.mercer.com/newsroom/january-2018-pension-funded-status-increased-by-two-percent-in-2017.html

Retirement Social Security Pension Risk Transfer JourneyGuide

The 5 Scariest Facts about Social Security


Annuities

I read a lot about the retirement gap in America. There are some scary scenarios ahead for many people who have not committed to saving, investing or planning for income they can not outlive. But some of the scariest statistics that continue to bother me are those around Social Security. 

 

No, it’s not the fact that 78 percent of people believe Social Security will run out of money in their lifetime.1 Instead, it’s the complete lack of education that the financial services industry is providing to clients. That’s something we can control and change. 

 

Here are five stats you should pay attention to: 

 

As advisors, we must learn the complexities of Social Security and convey that knowledge to our clients. The planners who do so put themselves in a much better position for long-term success. Their client retention will likely be higher due to the information they provide while preserving their assets under management. 

 

Winning Strategy

Learn as much as you can about Social Security in the income planning process. Clients want advice on this complex benefit, and they clearly need to know more in order to make better decisions about their future income. 

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We talked with Jim Blair to tackle unique situations around Social Security your clients may be facing.

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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. 

  

1Nationwide Retirement Institute, Social Security 4th Annual Consumer Survey, September 2017: https://nationwidefinancial.com/media/pdf/NFM-16735AO.pdf

2Center for Retirement Research at Boston College, “Trends in Social Security Claiming,” May 2015: http://crr.bc.edu/wp-content/uploads/2015/05/IB_15-8.pdf

Social Security Retirement Income Planning

Asset Location Over Allocation


Annuities

As I travel back from a business trip in Portland, I’m reminded how important location is on an airplane. Flying four and a half hours in the middle seat is not fun, especially when you don’t sleep on an airliner like me. 

 

Over the past few years, the location of assets has become more important in the financial planning arena. The biggest reason is the continued shift to income versus accumulation. During distribution, income is more important than the rate of return, which is largely driven by the allocation of assets. Let’s look at an example where location can improve your chances of success. 

 

Average Couple, Average Approach

A typical American couple approaches your firm. They have done a nice job of creating a nest egg for their retirement and would like to receive $50,000 a year in retirement income. They anticipate receiving $20,000 of annual Social Security income. So, they need to take $30,000 a year from their accumulated assets of $750,000. In other words, they will need to sustain a 4 percent withdrawal strategy from their assets under management. 

 

While the 4 percent rule worked during higher interest rate periods, most economists believe the safe withdrawal rate is around 2.8 percent to 3.5 percent. Without a doubt, this couple is in jeopardy of a significant failure in retirement, especially if they were to have a significant drop in asset value early in their retirement years. This is where asset location can make a huge difference over asset allocation. Because allocation doesn’t fully protect the clients from a loss in their account – it might make the ride smoother or reduce their losses and gains, but it will not provide protection from losses. 

 

What worked for clients during the accumulation phase will not work for them during the distribution phase. In fact, in many cases, the strategies that clients used to accumulate assets will hurt them in retirement.

 

New Approach, Better Outcomes

Let’s look at using different products to sure up their retirement income.

  • First, the couple buys a single premium immediate annuity (SPIA) to secure $9,000 of annual income. In today’s interest rate environment, that will cost just under $170,000 of the account value. The SPIA’s income is protected for both the couples’ lives, and if they both die before using up the $170,000, their beneficiaries get the balance of the unused funds. 
  • Next, the couple purchases a fixed indexed annuity (FIA). The $100,000 FIA generates $5,000 of guaranteed annual income. The clients remain in control of the assets and can change the annuity if something happens. 
  • Their remaining $480,000 is invested in their asset allocation strategy according to their risk tolerance. The assets only need to create $16,000 of annual income off the $480,000 in assets. That means that the use of two additional products reduces the withdrawal percentage to 3.3 percent. Most would agree the 3.3 percent is a significant improvement to the withdrawal percentage and increases the probability of success. 

 

The result is that the clients begin their retirement with the same $50,000 of targeted income: 

  • $20,000 from Social Security 
  • $16,000 from the systematic withdrawal strategy
  • $9,000 from the SPIA
  • $5,000 front the FIA

 

Notice that between Social Security and the annuities that $34,000 of their $50,000 annual income is guaranteed for the rest of their lives. That’s makes a powerful impact on their retirement income strategy.

 

Check out our one-page sales idea on this concept, and I think you will see that the location of assets is far more important than the allocation of the assets. The location strategy provides more consistent income with less volatility in income. Your clients will appreciate the guarantees and the unique location of their assets. 

 

Winning Strategy

Asset location is more important than allocation during the income phase. Look at using alternative income-producing assets to reduce pressure on assets and provide a more secure retirement income. 

 

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.”

Asset Allocation Retirement Income Annuities Social Security