Thought for the day:
Isn’t it interesting that when we present Life Insurance no one is going to die? When we present a Life Income Annuity they won’t be living long enough to get the value. GP
If you will read no further:
This is one of the most important editions of Pearls I have sent in a long time. Our phone is ringing off the hook from advisors requesting illustrations for annuities. Nowhere is there a more competent annuity source than Josh Ver Hoeve and the folks at Westland. Almost every design that is turned out does precisely what we are told the client needs to happen. Yet, only a small portion of the designs are eventually implemented. Annuities typically deliver income for life that is 50% to 150% MORE than can be safely generated by a managed portfolio in addition to being substantially tax free for years and guaranteed for life. Yet it seems that the final choice is often to create a portfolio consisting solely of non-guaranteed assets and rely on the skill of the advisor to navigate the uncertainties and the volatility in the market for as long as 30 years while the client ages, becomes dependent on family or caregivers and finally dies.
We believe this is because most advisors have not witnessed enough situations where clients have seen their assets dwindle and have to alter their lifestyle to preserve capital. They are not grasping the importance of securing for life, basic needs that provide peace of mind. The last major market collapse was 5 years ago. Many of your clients were 65 to 70. How old will they be when the next serious “market correction” happens? When the gains they have achieved in their portfolio dissolve once again. This may be good thing for youngsters who can take advantage of the bargain prices by adding more money to their portfolio. In retirement, they are taking money from the portfolio, so down markets are destructive both financially and emotionally. The solution is NOT to abandon the markets in favor of annuities; but rather to include annuities in the asset allocation of the retiree’s portfolio.
Thought for the future:
Last week we mentioned our research in the subject of annuities from folks who have significant expertise in their application within a retirement portfolio. We thought you might be interested in several comments in response to studies that question the annuity’s value. The ones that particularly interest me are the studies concluding that a successful retirement plan can be accomplished without the use of annuities. What I find interesting is that the “advantage” typically is very slight and relies on successful application of principals that would have worked in retrospect for the past 50 years.
“And though your strategy may be theoretically possible, it suggests and requires perfect behavior. Or…you can “buy income and invest the difference”, utilizing an efficient ladder of income annuities, eliminating the risk of sequence of returns, market volatility, liquidity, longevity and many other risks; then properly manage the remainder of the portfolio with three goals of liquidity needs, opportunity for growth and legacy with more ease. It is my assertion, most clients will be way ahead in the long run by finding competent advisors who know how to manage money and incorporate income annuities in a meaningful fashion.” Curtis V. Cloke Founder, Thrive Income Distribution System
“Any strategy not implementing SPIAs has the following problem: To optimally consume, you have to hit zero assets right when you die. Because you don’t know when that is, you have to “over-insure” yourself by taking less than you could. The “mortality drag” (the increase of life expectancy that comes with the increase of actual age of a person) has to be “paid” for by the portfolio and this reduces your withdrawal rate. This is not the case once a participant has annuitized a portion of their retirement assets. IRR on any pure drawdown strategy would quite simply HAVE to be better, and significantly so, to compensate for this problem. Furthermore, during retirement any decrease in the non-annuitized assets will disproportionally affect the longevity of the portfolio: For example, a 15% drop in asset value might lead to a 30% drop of “fundable life span” unless the drawdowns are adjusted accordingly.
IRR is largely irrelevant once it is adjusted for the risk of outliving your assets: Living without assets is so much more painful than dying rich, that people who have not annuitized will either draw down less than they could otherwise afford (which by definition would make the IRR useless to lifestyle), or run a risk that they can’t afford at all.
By Karl Strobl Past Global Head of Structured Products and Retirement Solutions for Deutsche Bank