Annuities

The Need for New Models


Annuities

Every few years, an economist wins an award for new money management strategies based on an algorithm. To date, many of these models have focused on the general principle of the bell curve. In numeric terms, 95 percent of market returns fall within two standard deviations of the mean.

At the Society of Financial Service Professionals 2019 FSP Institute, the new models focused on the other 5 percent. These returns – outside that bell curve – can be devastating, especially when combined with a longer life expectancy.

Let’s break it down. Managing a client's assets is difficult enough, but longevity breeds uncertainty. We know that clients either need significant assets or a low withdrawal percentage to sustain their retirement income stream. But both of those solutions assume a normal sequencing of returns. If they see significant negative returns, especially early on in retirement, it can devastate a portfolio. And the longer they live, the greater the likelihood they will experience an event outside of the normal bell curve.

Which brings us back to the models. New models, as they should, now include risks that fall outside the typical bell curve. The risk is simply too great to assume our clients will be in the 95 percent. And this risk factor – the unknown – is the main reason we continue talking about guaranteed income:

If a return-based portfolio fails, it is catastrophic. If a portfolio fails with guaranteed income, it is not catastrophic.

As we build client portfolios, we should maintain a deep focus on that 5 percent. The success or failure of our client's portfolio may depend on it. In theory, the odds of a financial crises are rare. The probability of these once-in-a-century events happening while in our retirement years is statistically slim. It all sounds reassuring.

And yet, three have happened in our lifetime. No matter how large or small your client perceives it to be, transferring this risk is critical to the success of retirement income plans. Factoring in the severity of these events will produce a more realistic view of how the portfolio will sustain itself.

In previous blogs, I've discussed the speed of today’s technology and the co-dependency of global economies. Financial markets are complex and can change rapidly. Despite the odds, it makes the risk of another Black Swan type of event very real. If that event comes at the wrong stage of retirement, it could be catastrophic. Timing is everything, and since we can’t predict the future, we must recognize that those returns might happen, then plan for them.

 

Winning Strategy: Look at not only the severity of market events but the timing. Consider the new models to portfolio management in producing income with longevity concerns in mind.

 


About the Author

Mike McGlothlin is a team leader, retirement industry activist and disciple of Indiana Hoosier basketball. In addition to being EVP of retirement at Ash Brokerage, he is a sought-after writer and speaker. His web series, “Winning Strategies,” provides insight and motivation for financial advisors in many forms – blogs, books, videos, podcasts and more. His latest book, “Free Throw for Financial Professionals,” is available now – learn more at www.freethrowsforpros.com.

 

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A Winning Perspective on Losing


Annuities

I was watching the Super Bowl on a business trip in 2017 when the New England Patriots made their famous comeback from 28-3. The people sitting around me were saying, “This game isn’t over” and “Brady is going to win.” I was struck by their incredible confidence, even as the Patriots fell behind by 25 points. In part, confidence comes from having a plan and the experience to execute it.

Recently, some of my favorite teams have been giving me the opposite feeling. We’ve all been there: that sinking feeling when our team is behind, with little confidence in the firepower on the bench to bring your team back. The team lacks the talent to compete. The coaching staff is not equipped to make the necessary calls. You look for anything to hold on to hope – if the team could just work that much harder or the coaches could lead that much better.

But as the game progresses, the pit in your stomach grows. The seconds tick down, but the team never catches up. Once the clock finally runs out, it’s almost more relief than a disappointment – at least the anxiety you felt as the seconds ticked away is finally over.

The final countdown makes a great metaphor for retirement planning. You begin your retirement game when you transition out of the workplace. The score is 0-0. By the time you reach the first 10 years of retirement, you begin to realize that you can’t buy the same things that you could when you first retired. By the time you get to your late 70s, it’s clear your assets won’t catch up to your total income needs. That same hopeless feeling hits the pit of your stomach. Your assets can’t work any harder because you can’t take the volatility.

As those assets diminish, it’s like the clock ticking down in the final minutes of the game, knowing the inevitable is about to happen – a loss. The anxiety leading up to the loss is just as strong. You are trying everything to stop the inevitable, but you know it is going to come. But it doesn’t have to be that way. Unlike sports, every American should be able to enjoy a successful retirement.

How do you do that?

You must understand the risk of longevity with your clients and address it. If you don’t, you put your client in a position of a potential loss. They are relying on your expertise to create a plan and execute. Make sure there’s a source of guaranteed income so your clients have confidence that they won’t have to stage a comeback – they’re already set up for the win.

Winning Strategy

Learn about how to transfer the risk of longevity to vehicles and implement those strategies. Give your client confidence they can win the retirement game.

About the Author

Mike McGlothlin is a team leader, retirement industry activist and disciple of Indiana Hoosier basketball. In addition to being EVP of retirement at Ash Brokerage, he is a sought-after writer and speaker. His web series, “Winning Strategies,” provides insight and motivation for financial advisors in many forms – blogs, books, videos, podcasts and more. His latest book, “Free Throw for Financial Professionals,” is available now – learn more at www.freethrowsforpros.com.

Confidence Longevity Retirement

Longevity: The New Three-Legged Stool


Annuities

Many people talk about financial security as a stool that has three legs. All three must be present in order to achieve financial success – protection, accumulation and income.

However, longevity presents its own three-legged stool. I didn’t think about it until I read the 2012 International Monetary Fund (IMG) Global Financial Stability Report. The report dedicated an entire chapter to longevity at three levels – individuals, government and corporate.


Impact on Individuals

I’ve written a lot about longevity in the past, but let’s recap. Life expectancies continue to increase – even as more and more studies show a decrease for the first time in several decades. It’s causing a looming retirement crisis in the United States, largely due to individuals understating their own life expectancy. More people will rely on Social Security as their sole source of income than ever before. Scary. But even more alarming is the impact longevity has on government and corporate plans.


Impact on Government

The government’s ability to provide minimal guaranteed income will be pressed by increasing life expectancies. In this study, just a three-year increase in life expectancy will equate to a 50 percent increase in the costs of aging for advanced economies. These new assumptions might prove devastating. In the United States, the Social Security Trust Fund is already close to expected payouts exceeding revenue. As this line is crossed, mitigating longevity risk at the government level might be more challenging than at an individual level.


Impact on Corporations

For corporations, balancing mortality risk in their pensions seems straightforward. Billions of dollars are transferred from corporate pension funds to insurance carriers using Pension Risk Transfer techniques. But with an aging worker population, the report indicated businesses could see as much as a nine percent increase in costs due to longevity. Investors will eventually see these additional costs reflected in stock valuations. And, there is a potential negative impact on valuations due to the unfunded, increasing liabilities associated with longevity and guaranteed incomes.


The New Three-Legged Stool

The three-legged stool holds true for longevity at the government, corporate, and individual levels. You must address the risks of lower Social Security, unfunded pension liabilities and individual shortfalls with your clients. Understanding these risks is necessary to have a complete and meaningful conversation with your clients.


Winning Strategy

Make sure your client is aware of the choice in government benefits and corporate pension options. These contingencies play an important role in the individual planning process.



About the Author

Mike McGlothlin is a team leader, retirement industry activist and disciple of Indiana Hoosier basketball. In addition to being EVP of retirement at Ash Brokerage, he is a sought-after writer and speaker. His web series, “Winning Strategies,” provides insight and motivation for financial advisors in many forms – blogs, books, videos, podcasts and more. His latest book, “Free Throw for Financial Professionals,” is available now – learn more at www.freethrowsforpros.com.

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4 Strategies for Rising Interest Rates (That You Might Have Forgotten)


Annuities

Fortunately or unfortunately, depending on your point of view, we haven’t had to worry about rising interest rates for nearly a decade. Monetary policy, including quantitative easing, forced interest rates to near zero for a period of time. Clients benefited from the falling rates through capital gains growth that historically has not been a large part of bond returns.

With today’s rising interest rates, financial professionals need to offer strategies that many clients haven’t thought of for several years. Some will seem foreign to clients, as well as financial professionals, due to the time lag since they have been last deployed.

  1. We can’t chase yield. In my opinion, this has always been a staple of good, quality advice. However, we tend to chase the highest rates in any vehicle. Pressure on adhering to best interest standards makes us think that the highest interest rate is only the right thing to do. I think we should make sure there is balance with long-term stability of returns, rather than simply chasing high returns. Look to build a more consistent portfolio instead of just finding yield for a portion of the portfolio.
  1. Laddering continues to make sense. Like all good professionals, we tend to tweak what worked for us until it no longer looks like the thing that was successful. Over the past decade, we have forgotten how to take advantage of rising interest rates. We’ve changed how we position interest-driven products as rates fell quickly after the financial crisis. By laddering your interest-driven vehicles, your clients eventually have all their funds at longer term duration, which should bear a better interest rate in normal yield curve scenarios, but with liquidity staggered throughout the portfolio. We find this is a good strategy for all rate environments, but we tend to get away from it at interest rate peaks. 
  1. The purpose of the asset must be defined. Many clients tell their financial advisor they want growth with the appropriate level of risk. And, we tend to oblige them with “custom designed” portfolios from a third-party money manager. Instead, let’s change the conversation to “What do you want this money to do for you?” This question has the potential to lead to a more open discussion around long-term planning. If the assets are for retirement, let’s position them accordingly, using strategies that make sense for protecting the longevity of the portfolio. Income is the new outcome which requires more complex analysis as opposed to the highest current interest rate.
  1. Adopt to new product development made for this environment. New designs tie returns to a variable interest rate benchmark. As that benchmark interest rate increases, the client’s rate increases the following year. Many will find a three or five-year duration long; however, using laddering strategies can be beneficial in mitigating this risk.

We face a lot of challenges as the baby boomer generation continues to leave the workforce toward retirement. If not handled correctly, a rapidly rising interest rate environment makes for a potential portfolio burden that many clients are not seeing clearly. Take time to review the client’s intentions and plan for a rising rate environment over the next several years. 

Winning Strategy

Evaluate your bond holdings and plan for a rising rate environment. Your clients are unlikely to see the risks ahead due to recent monetary policy. Put your clients in a position to win.

Winning Strategies Podcast

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Catch the latest insights from Mike McGlothlin and his guests on his podcast, Winning Strategies.

Venture over to listen to breakdowns of topics discussed here and webinar deep-dives that you won't hear anywhere else!

Listen Now!

 

About the Author

Mike McGlothlin is a team leader, retirement industry activist and disciple of Indiana Hoosier basketball. In addition to being EVP of retirement at Ash Brokerage, he is a sought-after writer and speaker. His web series, “Winning Strategies,” provides insight and motivation for financial advisors in many forms – blogs, books, videos, podcasts and more. His latest book, “Free Throw for Financial Professionals,” is available now – learn more at www.freethrowsforpros.com.

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Income, Income, Income


Annuities

As I write this, I’m traveling back from an industry meeting that my company sponsors. Being a numbers guy, I always enjoy hearing how the year unfolded, best practices in technology, and where sales increased and to what degree.

However, one of the disturbing trends that I noticed is our industry’s lack of focus on the best benefit of annuities: income.

In 2017, the industry lost $30 billion in sales that involved income, according to LIMRA. That trend continued in 2018. Economic conditions are the most likely reason for the continued shift. After all, clients have looked for safer places to place their retirement savings with the recent volatility in the fourth quarter of 2018. Basically, it’s been easy to sell annuities without the complexity of an income rider or loss of control due to the use of SPIAs or DIAs.

We tend to sell what clients want, not what they need. Ultimately, we have to work in conjunction with our clients’ goals but, too often, it feels like we may not be hitting the true need when we complete a transaction that doesn’t involve an income discussion.

Asset protection is an important function in today’s market conditions. Don’t get me wrong … annuities provide value to many portfolios with interest rates increasing, market fluctuations, and tax-deferred growth on nonqualified assets.

However, the biggest lift that annuities provide is the opportunity for lifetime income. Longevity affects so many other risks during retirement. The ability to shift this single risk to an insurer greatly enhances the probability of success in retirement.

Sequence-of-return risk remains a variable that no one can predict. The timing of a correction – in a modest or full bear market – can make as much as a 13-year difference in how long a client’s assets last. Without guaranteed income in place, an ill-timed downturn may affect the lifestyles of Americans who are depending on systematic withdrawals. Strategies that maximize Social Security and guaranteed income options can provide stress relief on the portfolio.

At the end of the day, failure of a portfolio with guaranteed income is not catastrophic. Portfolios without guaranteed income will be force into a different lifestyle.

Winning Strategy

With guaranteed income, failure is not catastrophic. Change your focus and talk to your clients about holistic income planning.

Winning Strategies Podcast

Craving More?

Catch the latest insights from Mike McGlothlin and his guests on his podcast, Winning Strategies.

Venture over to listen to breakdowns of topics discussed here and webinar deep-dives that you won't hear anywhere else!

Listen Now!

 

About the Author

Mike McGlothlin is a team leader, retirement industry activist and disciple of Indiana Hoosier basketball. In addition to being EVP of retirement at Ash Brokerage, he is a sought-after writer and speaker. His web series, “Winning Strategies,” provides insight and motivation for financial advisors in many forms – blogs, books, videos, podcasts and more. His latest book, “Free Throw for Financial Professionals,” is available now – learn more at www.freethrowsforpros.com.

Retirement Income Income Planning Winning Strategies