Annuities

The Immeasurable Return on Family Values


Annuities

While we’ve had our eyes on the U.S. Department of Labor’s Fiduciary Rule and Conflicts of Interest Rule, Congress has recommended some new tax laws that might adversely affect the American consumer even more so. 

 

A proposed bill would limit the amount of retirement funds that might be stretched to the next generation or the following generation. The proposal limits the amount a retirement investor can stretch to only $250,000. 

 

This is where you should look at different angles and new ways to attack the problem. Many annuities allow for joint, non-spousal annuitants. The advantage of this set-up is that both annuitants get income for both their lives. This allows annuities to be a vehicle that creates a “stretch-like” provision above the $250,000 of assets under management. 

 

More than Money

How would your clients and beneficiaries react to being able to do the following?

  • Grandparent receives an income on an asset for the rest of their life – guaranteed – with a cost of living increase each year
  • When the grandparent passes away, the grandchild receives the same income – guaranteed for their life – with a cost of living increase each year
  • On the grandchild’s 16th birthday, the planning firm sends a check plus a note from the grandparent about how special the “Sweet 16” is and to enjoy their teen years
  • On the grandchild’s 21st birthday, the planning firm sends a larger check plus a note from the grandparent about how important family values are as an adult – the grandparent writes about the fears they had when they were 21 and how they succeeded
  • When the grandchild weds, the newlyweds get a letter from the grandparent about the secrets to a 50-year marriage, and reaffirms the family values that helped them weather the storms
  • When the couple has their first child, a letter arrives talking about how challenging parenting will be, but the rewards of raising a child far outweigh the early mornings, teething, potty-training, and other heartaches in raising a child. The letter reassures them everyone has been there and, if they stick to the family values, their child will be successful, healthy and wealthy. 
  • And so on…and so on…

 

In these cases, the return on money becomes irrelevant. You are not helping your clients pass along just tax savings or a better return; you are perpetuating value that is important – their family values. 

 

Winning Strategy

Talk to your clients who have grandchildren. Show them how they could create a stretch provision that is not dictated by tax law. Instead, it is driven by their family values – I think they will find the idea more valuable than any return you could provide. And, it will likely give the family even more than you can ever provide through asset allocation. 

 

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 Annuities Tax Law Legacy Planning

Bond Risks in Retirement


Annuities

We frequently talk about sequence of return risk for a retiree’s portfolio. For many people, that risk is associated with equities only; however, bonds carry market risks as well. 

 

Unfortunately, many Americans have looked toward bonds as a safe vehicle since the financial crisis. Since that time, interest rates have generally been falling, making bonds an upward trend in prices. Bonds can fit into many portfolios, but we need to consider the risks in today’s economic environment. Three things to consider: 

 

  • Interest rates are at near all-time lows. When interest rates rise, bond prices decline – rates and bond prices move in opposite directions. Many planners have increased durations in their portfolios to provide more yield to their clients. However, the additional duration poses additional interest rate risk. For example, a five-year bond will have a 4.6 percent decline in value for a 1 percent increase in interest rates. The changes in bond prices are steeper the longer the duration. A 10-year duration bond would have an 8.7 percent drop in value due to the same 1 percent rise in interest rate. Given where we are on all segments of the yield curve, it’s likely to see rate increases over the next three to five years. This potentially creates sequencing risk on what many investors believe to be safety. 

 

  • Coupon rates continue to be low. I would argue that they are artificially low due to the financial crisis and the struggling economy. Regardless, it takes more than two times the capital to generate the same income than it did pre-financial crisis. For example, you could find a 5 percent coupon in 2009-10. It would only take $400,000 of capital to generate $20,000 of income. Today, it would take $815,000 to re-create the $20,000 of annual income. Notwithstanding a reversal of current monetary policy, these rates are likely to rise but very slowly. So, retirees don’t benefit from waiting.  

 

  • Bonds can certainly be sold quickly in today’s markets. By definition, that makes the instrument highly liquid. However, in reality, bonds may be sold at a substantial loss as described above. Depending on performance, bonds can be illiquid due to market conditions, and you can’t dictate when an emergency requires liquidation of capital for specific purposes. 

 

So, how do annuities stack up to the risks of bond portfolios?

  • Regardless of fixed or indexed, annuities provide no downside market risks. While fixed annuities may limit the growth potential, they protect the downside, making them more appropriate than ever to position into the portfolio. 

 

  • Income generation can be just as healthy using income riders versus relying on the coupon rate of the bond. In today’s market place, the client can easily find 4.5-5.0 percent distribution rates on capital. This means you would only need $400,000-$445,000 in order to generate the same $20,000.  

 

 

  • While most annuities have surrender charges due to their market protection and general account status, most products provide liquidity each year up to a certain percentage and for critical illnesses. In many cases, the surrender charge can be less than the loss of a bond value change, especially for longer durations.  

 

A bond portfolio provides diversity opposite an equity asset. And, bonds can be extremely useful as a part of the asset allocation strategy to maximize the efficient frontier. A mix of bonds and equities lessens the volatility while increasing the return. However, we need to consider alternatives to bonds in the current rate and economic conditions. There is as much risk in bonds as there is in the equity market in the current climate.

 

Winning Strategy

Look at your bond holdings. If those clients are getting ready to turn those bonds into income, you might consider the advantages of annuities. The rules change when you turn accumulation into income. When the rules change, you need to change your strategy. 

 

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 Bonds Income Planning Annuities

Low Maintenance Lawns and Portfolios


Annuities

I am not a handyman. Before marrying my wife two years ago, I made it clear she shouldn’t expect a lot of home improvement projects from me. Despite knowing that, we bought a 1920s home together. 

 

Now, the home was already fully remodeled. And, I don’t regret the decision because we invested in our community and chose to remain a part of downtown Fort Wayne. But, there are still a lot of things to do to “make it our own.” 

 

The backyard is a good example. After losing the grass to last summer’s heat, we decided to redesign the small backyard. For perspective’s sake, it takes me 300 steps to completely mow my front and back yards. That aspect of urban living is great! But, we still had to do something with the yard to make it look decent.  

 

After consulting with a landscaper, we agreed to add a fire pit and some plants. Because we wanted the least amount of maintenance, we choose perennials. By the time we were finished, the landscaper was able to fill the entire space with perennials and mulch, which eliminated the need for any future lawn mowing. This was not my original vision for the space … but, I now sit on the back deck and enjoy the backyard. 

 

Low Maintenance Planning

The investment in our new backyard gives me peace of mind because I no longer have to worry about cutting the grass. As I was out on the back deck this week, I thought about the ways alternative investments give peace of mind to so many clients. 

 

First, annuities can produce guaranteed income that stabilizes the portfolio. Our studies show the impact of guaranteed income can be substantial. I encourage you to look at our site for research white papers and interactive tools that show how much guaranteed income impacts a retiree’s income.  

 

Second, annuities provide market risk protection. In today’s uncertain economic climate, clients will likely appreciate the stability that alternative investments can bring. Whether fixed or indexed annuities, these vehicles protect clients from a likely rising interest rate environment.

 

Finally, having certainty in the income stream provides peace of mind to many clients, knowing they won’t outlive their income.   

 

Looks at your client portfolios, especially those that have a bond portion. For clients who are near retirement or in retirement, it makes sense to talk about how annuities can provide stability, security and guaranteed income. Just like I enjoy my low maintenance backyard, your clients will enjoy a low maintenance retirement plan.

 

Winning Strategy

Peace of mind is an important and immeasurable aspect of retirement planning. Look at alternative investments that can provide stability, security and guaranteed income. Not having to worry about income can make your clients’ retirement more enjoyable.  

 

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 Income Planning Annuities

We’ve Already Passed the Finish Line: A DOL Comment


Annuities

Today (Aug. 10), the U.S. Department of Labor’s request to delay the Fiduciary Rule’s full implementation was revealed. As with most regulation, there are technical aspects to the delay that will likely be argued by supporters and opponents. I want to make one thing clear: We’ve already passed the finish line for fiduciary status. 

 

Undoubtedly, the rule’s documentation could be less onerous. But, we shouldn’t ignore the fact that fiduciary status is here – and, it’s here to stay. We must adapt to it. We must innovate toward it. We must improve our client experience. We must keep our clients’ interest before our own. And, we must move the retirement income community forward … now. 

 

Many people will use this announcement to recommend that we go back to the old ways of doing business. It’s too late. Clients are beginning to ask their financial advisor if they are a fiduciary. Working with the clients’ interests has always been a priority, and the way that we operate our business. Today, really since the release of the proposal in 2016, fiduciary status is a table stake, a requirement and, most importantly, an expectation. In order to be successful in business, you have to meet or exceed the clients’ expectations. The value you bring is determined by how much you bring to the client above what they paid. The client expects maximum value, so you have to look at your marketplace beyond the regulation. 

 

The market has already begun to shift toward working in fiduciary status for all client relationships. Transparency continues to grow as an integral part of pricing fees and commissions. Disclosure has become a part of the product fulfillment process. Greater client awareness and education about solutions have become part of more sales presentations. In many ways, our industry has improved more in the last 12 months than it has in the last decade. 

 

I encourage those in the retirement income space to continue the move forward toward the fiduciary world. That doesn’t mean some of the DOL’s unintended consequences don’t need to be dealt with over the next 18 months. And, moving toward a fiduciary world doesn’t mean the elimination of commissions. However, we can’t go back on our commitment to serve our clients. With the complexity of retirement, there has never been a more important time to engage with Americans and help them solve their most difficult problems – longevity and income. 

 

Please stay connected with us to learn more ideas on how to best serve your clients in an uncertain regulatory and economic environment. Ash Brokerage has been active in the comment periods, and we look forward to answering our industry challenges through innovation, education and practice enhancement. 

 

Winning Strategy

When you run a race, you never look back. As you change your retirement income practice toward a fiduciary status, don’t look back. Keep your focus forward on improving your clients’ position, their experience with your firm, and how to best serve them. 

 

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.”

 

DOL Fiduciary Rule Retirement

Why Product Allocation Matters More Than Asset Allocation


Annuities

Several years ago, I attended a continuing education seminar from an insurance carrier. And recently, one of my co-workers gave a webinar about tax efficiency using life insurance. Both reminded me of how quickly we drift back to our old habits of asset allocation.  

 

So, I went through my continuing education files and found the case study from the seminar several years ago. Surprisingly, even with the drop in interest rates, the example still provides value to many retirees and their portfolios. Let me share it with you. 

 

The Situation

A husband and wife are both age 65 and getting ready to retire. Like many Americans, they have no pension plan but have managed to create a nest egg of $750,000. They have $20,000 of Social Security income between the two of them, starting at age 65. The difference in income, $30,000, needs to come from the assets under management using a systematic withdrawal strategy. That withdrawal equates to a 4 percent distribution. 

 

You may be thinking this sounds like a lot of your middle-American clients. And, you would be right. As I travel around the country, I see a lot of clients taking income off their assets through a more conservative asset allocation. But here are the problems with this set up:

  • There is no guaranteed income for life outside of Social Security
  • Research indicates that the 4 percent withdrawal rate may be aggressive, regardless of asset allocation modeling
  • 60 percent of their income would stop if they run out of money, which puts pressure on the management of the assets and the allocation strategy. Essentially, the clients may be forced to take on more risk (assume more return) later in life when volatility might not be appropriate.  

 

The Solution

Now, let’s look alternatively at product allocation and how beneficial it can be to our sample client. The client places $100,000 in a fixed indexed annuity with a guaranteed income rider that generates $5,000 annually. Next, they purchase a $160,000 single premium income annuity that pays $9,000 per year. Both are guaranteed for both the lives of the husband and wife, no matter how long they live. Finally, $490,000 remains in the asset allocation strategy, where they take $16,000 of annual income from the account.  

 

Here are the improvements with this strategy that generates the same $30,000 of income:

  • $34,000, or 68 percent, of the total income will never stop, regardless of how long they live, even if they run out of money in their assets under management. Social Security may adjust after the first death, but income will continue. 
  • Only $16,000 of their income is at risk if their account balance draws down to zero.
  • The systematic withdrawal is now just 3.3 percent. It’s still not at the recommended 2.85 percent, but it is half of the 4 percent strategy before the product allocation. 

 

The Takeaway

Product allocation is more important than asset allocation. The use of guaranteed income can provide the needed leverage to lower withdrawal rates and increase the stability ratio of the entire income portfolio.  

 

Winning Strategy

Product allocation should be the first thing you look at when constructing an income portfolio. Think about the location of products and income assets before assigning an asset allocation strategy.  

 

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 Income Planning Annuities