Annuities

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.

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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

4 Reasons to Focus on Income Planning


Annuities

Throughout the year, I travel around the country to visit advisors. Regardless of when or where I am, there is always an inclination that our industry will be replaced by technology.

Many firms have established some type of robo-advisor platform to attract the younger generation of investors. But we have to look at the future in terms of our clients’ needs – which goes beyond access to technology.  

I feel confident and bullish in our industry. And I believe we need a reinvestment in people to help overcome the challenges that so many Americans face during retirement. Below are just a few reasons:

 

  1. 10,000 Americans retire every day.1 This number will not decrease significantly until after 2030. There is nearly an endless flow of prospective clients for our industry to help. In fact, I would argue that we are underserving the majority of retirees because we don’t have enough advisors in our industry today.
  2. Social Security continues to be misused. Even with all the education that our industry has provided over the past decade, less than 5 percent of retirees maximize Social Security and defer the income to age 70.2 Case study after case study show the benefits of the primary wage earner delaying income.
  3. We continue to live longer. According to the CDC, Americans are living 2.5 years longer for every decade since 1900.3 But we have saved less money than any time in American history. The combination of these facts means that we will have to provide more income for a longer period of time with fewer assets than any planners before us.
  4. Annuities are one of three vehicles to protect against longevity. Defined benefit plans continue to be removed from employees’ benefits. Social Security provides longevity and inflation protection to some extent. However, annuities are the only vehicle that Americans can put their hard-earned assets into and gain mortality credits that help offset longevity.

 

All of these reasons mean the need for income planning will continue to increase for the next 10-15 years. If you are looking for a new concentration, look at retirement income planning. I am confident that you will help thousands of Americans and find a pool of prospective clients for many years.

 

Winning Strategy

Implement retirement income planning into your practice. There are plenty of prospective clients and an abundance of need.

 

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.

 

Learn More

1Pew Research Center, “Baby Boomers Approach 65 – Glumly,” December 2010: http://www.pewsocialtrends.org/2010/12/20/baby-boomers-approach-65-glumly/

2The Motley Fool, “When Does the Average American Start Collecting Social Security?” April 2016: https://www.fool.com/amp/retirement/general/2016/04/19/when-does-the-average-american-start-collecting-so.aspx

3Duke University, “People are living longer and healthier: Now what?” March 2010: https://www.sciencedaily.com/releases/2010/03/100324142121.htm

Retirement Income Planning robo-advisor

The 5 Scariest Facts about Social Security


Annuities

I read a lot about the retirement gap in America. There are some scary scenarios ahead for many people who have not committed to saving, investing or planning for income they can not outlive. But some of the scariest statistics that continue to bother me are those around Social Security. 

 

No, it’s not the fact that 78 percent of people believe Social Security will run out of money in their lifetime.1 Instead, it’s the complete lack of education that the financial services industry is providing to clients. That’s something we can control and change. 

 

Here are five stats you should pay attention to: 

 

As advisors, we must learn the complexities of Social Security and convey that knowledge to our clients. The planners who do so put themselves in a much better position for long-term success. Their client retention will likely be higher due to the information they provide while preserving their assets under management. 

 

Winning Strategy

Learn as much as you can about Social Security in the income planning process. Clients want advice on this complex benefit, and they clearly need to know more in order to make better decisions about their future income. 

Retirement Webinar

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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. You can get his latest book, “Winning Strategies: The New Rules of Retirement Planning,” on Amazon. 

  

1Nationwide Retirement Institute, Social Security 4th Annual Consumer Survey, September 2017: https://nationwidefinancial.com/media/pdf/NFM-16735AO.pdf

2Center for Retirement Research at Boston College, “Trends in Social Security Claiming,” May 2015: http://crr.bc.edu/wp-content/uploads/2015/05/IB_15-8.pdf

Social Security Retirement Income 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