Creating True Liquidity

Creating True Liquidity

As I travel and speak with different groups and advisors, I’m pleasantly surprised by their willingness to learn how annuities and life insurance can create true and free liquidity. Too often, clients and their advisors view mutual funds, stocks and bonds as the only source of liquidity in the markets. 


I agree those instruments provide liquidity due to the markets on which they are listed. However, market risks and sequencing risks may hinder liquidity when you need to convert the vehicle to cash quickly. And, that is the most worthwhile definition of liquidity – the ability to convert something to cash quickly. 


If properly used, life insurance and annuities can help create liquidity as part of an overall asset allocation strategy in just about any portfolio. Let me give you a couple of examples. 


  • Annuities and life insurance may work as a non-correlated asset class in the income phase of a retirement strategy. In our studies, we ran 50 simulations using the past 20 years of market sequences. For every year with negative market returns, we took the required income from a non-correlated asset. Over 20 years, the use of a non-correlated asset fell from 26 percent to 2 percent. Non-correlated assets may be found in the form of cash, cash value life insurance, and fixed annuities. The net difference in values was neutral (both had at least one failure) to as much as $621,000 in portfolio value. This can create overall liquidity when you don’t want to liquidate securities during bear markets.


  • Our research also shows that most retirees can maximize their income and create the most liquidity with 15-25 percent producing guaranteed income. Guaranteed income comes from three sources: Social Security, defined benefit plans, and insurance companies in the form of annuities. With guaranteed income securely positioned, the assets under management are not required to create the retirement income. And, those incomes are more stable due to the fact that the withdrawal percentage is below 4 percent in many instances. This positioning creates a “pool” of assets that are not needed for income purposes. It can be used for charitable purposes, to address health care and long-term care, or maintain a healthy reserve pool for the emergencies. 


  • Longevity creates many concerns for retirees. One of the most costly is long-term care. It is an unknown risk and increasing cost in any retirement plan. Today, it is not a capital issue, but rather a cash flow issue. For a client who has a 95 percent probability of success in their retirement plan, their chances of not running out of money with just one, three-year long-term care event reduces their probability of success to 2 percent. Had the client purchased long-term care insurance – either hybrid on a life policy or annuity, or a rider on a life policy – the probability of success is buoyed at 85 percent.  


I’m happy to show you these numbers and studies in action, so you can see the impact for yourself. But, the bottom line is this: While the specific product may not create immediate liquidity, the proper use of annuities and life insurance can provide free, unrestricted liquidity for many portfolios. The use of annuities and life insurance may create many tax advantages by investing in a different asset allocation focused on long-term capital gains. (Please consult a tax advisor for specific benefits.) Take the time to learn how a small portion of the product allocation makes exponential gains in the performance of the income plan. 


Winning Strategy

Many times, clients want to do a lot with little money. They end up choosing which priority to address. Look at annuities and life insurance as an alternative. They create liquidity within the portfolio if used properly. 


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.”