Annuities

How Guaranteed Income Drastically Changes Retirement Distribution


Annuities

As I’m writing this (January 2018), it’s hard to think about safety in a portfolio. The equity markets continue to rage with double-digit growth for the past several years. There seems to be a new stock market high just about every week, if not every day. 

 

But accumulation and income are two different animals. So they require two unique approaches to solve the client’s problem. 

 

Accumulation

Take a look at systematic contributions to a qualified plan like a 401(k) plan or a nonqualified systematic investment plan. As you’re making ongoing contributions, you buy more shares of the investment when the market (or, specifically, the investment) is down. As the value of the investment increases, you have purchased more shares and gain exponential value. The math phenomenon is called dollar cost averaging (DCA). By being disciplined and consistent, your average cost per share is less than the average paid per share, due to your ability to buy more when the investment is down.

 

Distribution

If you are relying on systematic withdrawals during retirement, the opposite math phenomenon works against you. As you withdraw funds for income, you are liquidating more shares when the market corrects. Therefore, you lose more shares for when the market recovers. It multiplies your losses in a way. After the correction and recovery, you will have less units or shares than you would have with a steady market. 

 

Guaranteed Income

Guaranteed income options provide stability in retirement income planning. Having a protected baseline of income reduces the pressure the portfolio might otherwise take on during the distribution phase. With guaranteed income, there is no need to reduce your unit holdings in order to generate the same level of income; thus, you have a better chance of protecting your assets for the long haul. The less you have to take out in a down market keeps more of the shares, or units, in assets under management for growth, inflation protection and capital gains treatment. There is nothing worse than paying tax on a liquidation that has corrected but still has embedded gains. 

 

Take a look at using a guaranteed income tool to provide a floor for distribution planning. You client benefits not only from the peace of mind, but also the ability to make their assets last longer during retirement. 

 

Winning Strategy

Give guaranteed income options a look. By shifting the downside distribution risk to a guaranteed stream of income, the client can likely maintain their asset base longer 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.”

Accumulation Distribution Guaranteed Income Retirement Planning

Digging Deeper: 3 Ways to Generate Revenue from your Existing Book of Business


Annuities

As I travel around the country on business, I enjoy talking with advisors from different channels – banks, broker-dealers, independent agents, registered investment advisors. Regardless of business model or channel, one consistent topic always comes up: 

 

“I need to find more clients. Can you help me with a seminar or dinner so I can find new clients?”

 

But, I like to think of the question in a different way and ask: 

 

“Are you interested in finding more clients? Or more revenue for your practice?”

 

Usually, the answer is revenue. But advisors tend to think that new clients are the source of new sales and revenue. Which is partly true. However, there’s a goldmine of existing opportunities with your existing clients. 

 

Mine Your Book

According to LIMRA’s 2016 Fact Book (its most recent edition), there are $486 billion of assets in nonqualified annuities – both variable and fixed – on carriers’ books right now. Some facts to consider: 

  • These contracts are NOT being annuitized and the owners are NOT electing to receive income from the rider
  • Approximately 33 percent of those owners are older than 75. Of those owners, 65 percent are classified as affluent, high-net-worth or mega-millionaires – those are all the clients that you either have in your book of business or are already recruiting to the firm. 

 

To make a difference with the people you’re already working with, I suggest that you dig deeper. Look at those older contracts and find a better use than just tax-deferred accumulation. Here are three suggestions:

  • Talk to your clients about putting the IRS in the back of the line, and your clients and their beneficiaries in front. Products today offer an exclusion ratio with the ability to access the cost basis first, without incurring the ordinary income tax immediately at time of death. Then, the beneficiary can spread out the tax consequences for a longer period. 
  • Turn tax-deferred assets into tax-free benefits for long-term care purposes. Only 7 percent of Americans have shifted their risk to an insurer. Asset-based long-term care products allow you to transact an exchange without current taxes and continue the tax-deferred growth. If the client uses the funds for qualified long-term care expenses, the cost basis and gains are returned to the client tax-free. You’ve taken a future tax consequence and turned it into useful and timely tax-free capital. 
  • Lock in the gains. We’ve seen an unprecedented bull market since the financial crisis. Many clients may do not want to take as much investment risk as they did 10 years ago. And, when asked about it, they probably don’t want to feel the same pain they felt in 2009. Sweep the variable contracts with no downside protection to a more secure vehicle that qualifies for a tax-free exchange, either fixed or fixed indexed. You might want to look at an income rider to provide options for the client if the market does correct and they wish to take income from another source besides their systematic withdrawal from equities and bonds. 

 

I think if you were to talk to your prospective clients about these ideas, they would find more benefit to working with you. You might even speed up the sales process. More importantly, you provide a valuable benefit for those clients. 

 

Winning Strategy

Dig deep into your client base. Ask more questions about assets held outside of your firm. Provide solutions that defer taxes and put your clients and their beneficiaries first. 

 

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 Practice Enhancement Revenue

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

Why You Must Be Willing to Receive in Order to Give


Annuities

The title might seem a little confusing. The concept of being willing to receive is confusing, at best. 

 

All this month, we have talked about the Go-Giver Laws of Stratospheric Success.1 All of the Go Giver laws are within our control. The “Law of Receptivity” is no different. Staying open to opportunities might seem easy on the surface, but it might be the most difficult. 

 

Take Notice

When I was a child, my parents bought it the Volkswagen Beetle fad of the early ’70s. The little cars were fun to drive and got great gas mileage. I loved the rumble seat in the back of the car where my brother and I rode to kindergarten and grade school. The trunk was in the front of the car while the engine was in the back. So the rumble seat truly rumbled! 

 

The McGlothlin family Volkswagen was a bright orange Beetle. You could see us coming for miles. When dad brought “Herbie” home from the dealership, we thought we had the only orange VW in Indianapolis. But, as we drove around the highway and even around our smaller community in central Indiana, we noticed a lot of orange VW Beetles. I’m sure you can say the same thing for your car. You never really noticed another until you bought one. Then, all of a sudden, they’re everywhere. 

 

Being open to receiving is similar. You’re always looking out for others, solving their dilemmas, and adding value to the relationship. Adding value will always be followed by someone giving to you. You don’t recognize it until after it is happening, just like you don’t see the orange Beetle until you’ve bought it. 

 

Breathe Through It

The natural flow of business is an exchange of value. This is usually done in dollars for service or a product. But, receiving is much more than that. Receiving can be a simple “thank you” for doing something special. It can be a mutually beneficial business relationship. It can come in many shapes and sizes, but you’ll know it when you receive it. And, you must be willing to receive it in order to continue giving properly. In “The Go-Giver,” breathing is used as an analogy for giving and receiving. You must exhale in order to inhale and vice versa. 

 

It’s important to always remember that receiving isn’t a scoreboard – nothing about the Laws of Stratospheric Success is a scoreboard. You can never count your chips by how much time, energy and value you have provided. You can’t think that you are “owed” something in return. Instead, it will flow naturally, maybe even you least expect it. 

 

Winning Strategy

Be open to success. Don’t expect it. Earn it. But always be open to it. 

 

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.”

 

1Bob Burg and John David Mann, “The Go-Giver: A Little Story About a Powerful Business Idea”: https://thegogiver.com/

Receiving Practice Management The Go-Giver Retirement

Now is the Best Time to Be … YOU


Annuities

This is the most incredible time in our industry to be a human … any human … well, actually, you! While there is a preponderance of online software, no one can deliver the value of real, authentic human beings. 

 

Technology competes largely on price. Software can calculate retirement income for less money, or help people manage their own finances for half the cost. But, when you compete on price, you roll the dice. While technology might do some things well, it can’t compete with everything you can do. 

 

  • You can look people in the eye and talk to them about the harsh realities of longevity
  • You can help others overcome the emotional roadblocks to improving their savings and income planning
  • You can explain how everything will be OK if a spouse dies unexpectedly
  • You can protect an entire family and discuss options to transfer business ownerships, retirement plans, and long-held family assets
  • You can ask insightful questions to find the real reasons a person is investing 

 

Our industry’s true value is all of us – the unique individuals who take time to fully understand the needs and desires of our clients and prospective clients. As Bob Burg and John David Mann explain in “The Go-Giver,” authenticity is your best asset.1 Each of us brings a unique talent to the table. You can ill-afford to be another robo-advisor focused on pure numbers, beating the benchmarks by a couple basis points, or having slightly lower fees. 

 

Your clients want more. They want you. They want someone who will look them in the eye and say, “You are going to be fine. We are going to take care of you.” Don’t try to compete against a custodian or a large financial institution – just be yourself and you will find people who want that interaction.

 

Winning Strategy

You are your best asset. Don’t try to be something you’re not. Surround yourself people who complete your financial practice. But, most importantly, be yourself within your network and in your client interactions. It’s your best differentiation.  

 

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.”

 

1Bob Burg and John David Mann, “The Go-Giver: A Little Story About a Powerful Business Idea”: https://thegogiver.com/

Authenticity Practice Management The Go-Giver Retirement