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

How to Flip Your Strategy from Accumulation to Income


Annuities

Winning sometimes requires looking at alternatives. That doesn’t mean you win with illegal actions or without integrity. Instead, it means attacking a challenge differently than you normally would. You do so because your opponent is unique and the consequences of losing are high.  

 

On the Offense

In 1984, I had the privilege of seeing one of the greatest minds in basketball, Coach Bob Knight, prepare for a regional semi-final game against the No. 1 team in the country and the defending national champions. The opponent, the University of North Carolina, played with a half-court trapping defense that had been a staple of their legendary coach, Dean Smith. Their team consisted of players that many college basketball fans recognize: Brad Daugherty, Matt Doherty, Sam Perkins and a guard by the name of Michael Jordan. (He was a great player in college as much as he was in the NBA.) 

 

Losing this game would mean Indiana’s season would come to an end and there would be no chance at a regional or national title. So, we had to look at this mighty opponent differently in order to have success. 

 

As a student manager, during the week of preparation, I took several messages to Coach Knight. He sought out the advice from basketball icons like Henry Iba and Pete Newell. We played a motion offense and typically had our guards bring the ball up the court. We started four freshmen that year and, with Carolina’s press so disruptive, our young team might have folded under the pressure. So, we needed to look at alternatives.  

 

Coach Knight practiced with our guards positioned in the corner so we had an outlet to relieve ourselves of the pressure. Additionally, we experimented with having our big men bring the ball up the court while having our smaller guards in the low post. Essentially, we flipped the court on the opposing team and took our biggest risk – their half court trapping defense – off the table.  

 

An Alternate Defense

In retirement, our clients face several risks, and the consequences are just as devastating – you don’t get a second chance at planning a retirement. Therefore, you need to take risks off the table by thinking alternatively. Today’s economic environment presents several ways to look at alternatives to improve the client’s retirement.  

 

  • We have historically low interest rates, making it more difficult to retire through capital preservation
  • Most people believe over the next three to five years we will see increasing interest rates that might depreciate the bond values that some many look to for safety
  • Our government continues to manipulate monetary policy, making it uncertain how bond markets will react to “uncensored” interest rate movements
  • We continue to be part of an extended bull run following the financial crisis that many believe is running out of steam

 

So, it’s more important than ever to look at alternatives, especially for those invested in bonds. Fixed indexed annuities can provide alternative income streams, protection from markets risks, and tax deferral. I encourage everyone to look at alternatives and share them with your clients. 

 

Winning Strategy

Retirement is the most complex problem your clients will ask you to solve. You can’t win the game with the same strategy you used during accumulation. Instead, you have to consider alternatives to better your client’s probability of success during 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.”

Retirement Annuities Financial Planning

Take Advantage of Today’s Tax Laws


Annuities

Looks can be deceiving. Nowhere is that more true than in retirement planning. The client who drives a modest car, wears jeans and eats at Bob Evans ends up being the millionaire next door, while the flashy dresser with the fancy watch has a pile of debt and little to no nest egg to fall back on.  

 

Looks can also be deceiving when it comes to investments. All too often, clients get caught up in seeking the highest rate of return they can find in an investment. Unfortunately, many don’t always walk away with the best net return because of what’s hidden underneath: taxes and fees.  

 

Just like a fancy watch, those attractive, high interest rates do not tell the whole story. Within many typical, non-annuity-type investments, there are certain pieces of drag embedded in the total return. 

  • There are sales charges with the purchase or redemption of the asset
  • There may be annual fees for overall investment and planning 
  • Perhaps the most harmful are capital gains and ordinary income taxes – those can cost clients more than a third of return on an annual basis

 

So the initial high interest rate that enticed the client ends up being irrelevant after taxes and charges eat into it.    

 

Don’t Miss Out by Misunderstanding

Like I said, sometimes you will find the modest, jeans-wearing client ends up having the highest net worth. In the same vein, annuities are plain and simple but offer surprisingly essential benefits. One of the strongest reasons to position part of a portfolio with annuities is to take advantage of the tax-deferred growth. During the accumulation phase, the asset grows without the drag of either capital gain or ordinary income tax. 

 

Now, some will argue that the deferral creates a larger tax bill at distribution. But, that’s only true if you completely liquidate the annuity. If the goal is to live off the annuity with just interest and systematic withdrawals during retirement, you will have created a much larger nest egg during accumulation rather than paying taxes annually. After all, “It’s not what you earn – it’s what you keep,” and annuities are instrumental in helping the client do just that.

 

Build a Bridge

Additionally, the low interest rate and favorable tax treatment of annuities creates a unique planning opportunity to help maximize Social Security benefits. By bridging early income at age 62 with a non-qualified single premium immediate annuity (SPIA) rather than starting Social Security, as much as 96 percent of the client’s income is tax-free. This bridge allows the client to minimize tax drag on their income and wait to maximize their Social Security benefits at age 70.  

 

The difference in Social Security income at age 62 versus age 70 might be as high as a 50 percent. That increase might translate to more travel, more time with family, or a larger cushion for necessities like medication. More importantly, this strategy affords the client to have more of their money linked to income that keeps pace with inflation. And, inflation might be the cruelest tax of all. 

 

Today, the average younger baby boomer (aged 50-59) has only saved $130,1001, so it’s critical to create as much asset value as possible in the future. Tax laws are always changing – in fact, there have been 31 changes in U.S. tax rates in the 34 years between 1979 and 2013.2 So you have to take advantage of what's available now. It’s important to help your clients remove their “interest rate blinders” and see the many benefits of annuities – benefits they might miss on first glance. 

 

Winning Strategy

Many people do not realize the powerful tax advantages of annuities. Plan how you can help your clients seize the opportunity of the current tax laws governing annuities. The disparity between annuities and other investments may not last long.  

 

Learn More

1LIMRA, “Fact Book on Retirement Income 2016”: https://www.limra.com/bookstore/item_details.aspx?sku=23518-001

 

2Tax Policy Center, Statistics: http://www.taxpolicycenter.org/statistics/historical-average-federal-tax-rates-all-household

 

 

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 Taxes Tax Efficiency Financial Planning