Annuity Awareness Month means different things to different people. Personally, I like to concentrate on the proper uses of annuities, regardless of the economic environment.
Too often, especially lately, I hear advisors talking about rates being too low to consider annuities. But, I think low interest rates provide a unique opportunity to show how annuities create tax efficiencies in income planning.
As planners, one of the obstacles we face is the misuse of social systems for income. Today, only 4 percent of women and 2 percent of men elect to take Social Security at age 70 so they gain the maximum income for life on an inflation-adjusted basis. I talk to many advisors and clients about maximizing the government’s programs as a base income level. Single premium annuities can be a perfect fit for bridging that gap between early retirement and higher income levels for life.
With today’s “low interest rate environment,” annuities generate a more tax-efficient income than ever before. If you position a single premium immediate annuity with an eight-year period certain, 95.6 percent of the income is tax free (return of basis). This allows you to position income with non-qualified assets between ages 62 and 70 equal to what would have been early retirement income levels. With tax-free distributions, you have lowered the client’s tax bracket, allowing you to convert pre-tax dollars in an IRA to after-tax dollars using Roth conversions.
The net effect is that your client …
All along, the income annuity (as of May 2017) earns a 1.16 percent rate of return, which is typically higher than most certificate of deposit rates and comparable to U.S. Treasury rates for similar durations.
So, if you ask your clients if they would like to maximize their Social Security, reduce the tax on their qualified money, and create more lifetime income, how many do you think would say, “Tell me more”? My guess is that will start a conversation with a client or prospect. And, that’s why I get excited about making your clients aware of annuities during low interest rate period – tax efficiency.
Talk to your clients who have indicated that they want to retire early, at 62 or 65. Give them options that create tax efficiency in their portfolio, regardless of the interest rate environment. Make your clients aware of the possibilities with annuities. That’s real #AnnuityAwareness.
Implementation is here. The U.S. Department of Labor did not pursue another delay to its fiduciary rule, and the deadline has come to pass. Even though many people in our industry would have preferred more time, I believe now is the right time to refocus our attention on our clients. The fiduciary rule will be a change, but the transitionary period offers relaxed rules in order to comply.
For the past 14 months, I have been writing about redefining your business. Now that we are crossing the threshold to the rule, my message is the same. This transitionary period offers a chance to continue the thought pattern around how your business should look in 24-36 months.
I have always thought there are two key questions that you need to ask yourself:
Regardless of the final rule, revisions or revocations, your business will need to look differently than it does today. The marketplace is demanding more holistic planning and a fiduciary mandate. The real question is:
How do you rise above the other fiduciaries who are born out of regulation?
I think you separate yourself by the way you segment your client base, the services you provide, and frequency of services you provide to your top clients. If you move up market, you will need to really concentrate on segmenting your business and making sure there is a successor to your less than “A” clients. Additionally, you will need to make sure you have the right resources around you in order to compete in the higher net worth market place.
According to an American Institute of CPAs/Harris Poll in March 2017, 88 percent of Americans worry about running out of money have having to return to the workforce. If you redefine your business to focus on guaranteed income and longevity issues, I think you will have an opportunity to thrive in a fiduciary world and create differentiation between you and other planners.
Take the transitionary period of the DOL to redefine your business and shape it to how you want it to look in 24-36 months. Take steps now to differentiate yourself based on our aging population’s concerns.
Recently, our division sponsored Wendy Boglioli as a speaker for one of our partner firms. I always enjoy being around Wendy. She is an Olympic champion swimmer, a long-term care advocate and a genuine professional. If you need a great, motivating speaker, I highly encourage you to consider Wendy.
During the event, Wendy spoke about how her swim coaches prepared her team for races. They were ready for anything to go wrong. And, a lot of things can go wrong:
The list goes on ... The same goes for financial planning. You have to plan for the unexpected.
Guaranteed income creates a safety net for many unexpected events and economic conditions. I offer my own parents as an example.
Over the last four decades, my parents have endured several cardiac events. Medical advances since my father’s first heart attack have lengthened his life expectancy, but possibly at the risk of the quality of his last years. Guaranteed income sources have allowed them to establish reserve funds for their escalating care need.
I don’t think my parents thought my dad would live to age 88 when he retired before the age of 62. Dad’s company helped him bridge the gap between his retirement date and early Social Security income. Additionally, both my parents had pension plans they use to receive regular, guaranteed income. They wrap their government and pension payments with selected annuity payments from annuities purchased decades ago. Finally, they have a portion invested in equities and bonds to provide growth. But, Dad has received multiples of the cash balance in his pension plan with no care in the world about its rate of return or upside potential.
That’s why annuities and guaranteed income are so important to Americans today. The use of mortality credits in annuities provides guaranteed income without concern for rates, market corrections and managing assets.
Through the years, my mom and dad have been able to travel the world, manage their medical expenses and create a healthy standard of living. While their health care is largely an unknown in the future, the reality is that guaranteed income gives them an avenue for stability in a world filled with uncertainty.
Take the time to look at how guaranteed income can fit into the portfolio for your next client. We find that 15-25 percent of a portfolio should generate guaranteed income to make it efficient. But, talk to your clients about what it will mean to them to be assured they have a consistent income regardless of portfolio performance. I think they will appreciate the value of guaranteed income.
These days, it seems there is a holiday for every event and every little occasion. At times, I think because everything is a higher priority moment, then nothing is important in this world any more. The financial service industry is no different, with several months highlighting products throughout the year.
That said, June is Annuity Awareness Month. While I’m biased as an income planning specialist, I think it’s important to highlight why annuities are so important to consider with clients.
A recent ThinkAdvisor article1 highlighted the growing number of people aging to 100 …
We have more Americans living longer than ever before but our savings and wealth has not changed significantly to keep pace with the longer life expectancies. We must add guaranteed income to our plans to protect against living longer than expected.
Except for high inflationary times or around the financial crisis, the American savings rate has been in a steady decline over the past 40 years. The result is a median account balance of $130,100 for trailing baby boomers (age 50-59).2 This puts our industry in a position where we need to create more income from fewer assets than ever before. Mortality credits associated with annuities can boost yields and incomes to help close the gap.
Due to means testing in health care premiums, longevity concerns become more critical in client discussions. Tax efficiency in Modified Adjusted Gross Income and Combined Income levels can reduce premiums by 20-30 percent at different tax brackets. Managing the tax burden on income with tax preference items like annuities can be beneficial to clients paying health care premiums to the government.
In addition to general health care, long-term care can’t be ignored as a longevity risk. Asset-based long term care provides the opportunity to take existing tax-deferred annuities and create tax-free distributions when the client needs them most. As planners, we must do a better job of matching the asset with the potential need in the future – not just the funding, but the taxation of the benefits.
Too often, we get stuck in the same sales process and product mix. Use Annuity Awareness Month to look at ways to better leverage annuities with your clients. Take the time to find out how annuities can work in the best interests of a client or prospect. Our economy and demographics are changing, and we need a fresh look at solutions that will make a difference for Americans.
In June, look for ways to use annuities in your financial planning practice. Whether you’re looking to close an income gap, create more tax efficiency, fund long-term care, or just provide more stability, give annuities a chance to prove their value.
1ThinkAdvisor, “Life Expectancy Holds Steady, but Not for 95-Year-Olds,” http://www.thinkadvisor.com/2017/04/12/life-expectancy-holds-steady-but-not-for-95-year-o
2LIMRA, “Fact Book on Retirement Income 2016,” https://www.limra.com/bookstore/item_details.aspx?sku=23518-001
While you might be afraid of the fiduciary rule and its effects on your business, there are so many reasons to be optimistic about the future of our profession right now. Below is a list of just a few of the changes I believe will continue to impact our industry – and increase the need for quality financial professionals – for years to come.
Defined contribution plans offer better choices, potentially lower fees, and tax-favored investing. However, few plans have mechanisms to provide lifetime income, so the vast majority of Americans need advice on converting their accumulated wealth into sustainable income. The loss of guaranteed income places pressure on assets under management like never before. The planner who can specialize in income planning can differentiate themselves for decades to come.
For long-term retirement savings, the savings rate in the United States remains around 5 percent, and baby boomers have a median retirement account balance of $130,100, according to LIMRA’s 2016 Retirement Fact Book.1 This means as planners, we will be challenged to generate more income with fewer assets than ever before. Clients will value creative and innovative professionals much more than a computer program to solve this problem.
More than half of Americans take Social Security early – only 2 percent of men, and 4 percent of women, defer their income to age 70.2 That behavior tends to cost retirees as much as a 56 percent difference in income at age 70. With Social Security having an inflation factor, the income discrepancy will grow more during retirement. Advisors who can provide meaningful advice on maximizing income will separate themselves from the pack.
Health care is the largest inflationary risk for elderly Americans. The uncertainty around premiums, coverages and providers means that planners must have a conversation about who, how and where will health care be provided during retirement. Knowing this and providing quality advice on health care will become more important as baby boomers grow older.
In the United States, housing wealth is larger than all of the assets under management for both qualified and non-qualified assets. More importantly, many Americans need to downsize or rightsize their housing plans in retirement. Solutions around the proper use of housing wealth and housing lifestyle will only grow in importance as our clients transition from a working career to retirement.
These are just a few of the demographic and social concerns our industry faces as this generation heads to an unknown retirement. Few, if any, of these concerns are likely to be answered by a computer screen and an algorithm. Instead, these issues are real life concerns that need to be discussed, weighed, informed, and addressed with a meaningful and purposeful process. I am confident our profession is well positioned for success for the next several decades.
Look at all the demographic and social changes around us today. These changes will influence many of our clients and prospects for several years to come. If you can address these problems, you are likely to gain market share in your business.
The marketplace is demanding financial professionals to work in our clients' best interest, which will not only need to address retirement income, but also the risk of longevity.
1LIMRA, Fact Book on Retirement Income 2016: https://www.limra.com/bookstore/item_details.aspx?sku=23518-001
2The Motley Fool, “When Does the Average American Start Collecting Social Security?” April 19, 2016: https://www.fool.com/retirement/general/2016/04/19/when-does-the-average-american-start-collecting-so.aspx
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