Thought for the Day:
“People often say that motivation doesn’t last. Well, neither does bathing — that’s why we recommend it daily.” Zig Ziglar
If you will read no further:
There was an interesting article in a recent issue of Financial Advisor Magazine submitted by a financial planner in the Midwest. It was about the need to be sure that clients who depend on their portfolio for their income not outlive it. He discussed how he handled the situation using Monte Carlo with 93% likelihood of NOT running out of money. Without getting into details (you can read for yourself by going here) my sense was that the strategy being described might just work. But there was clearly something left unanswered. Why must the client (after paying for professional advice) still be at risk and still endure the stress and fear that occurs every several years when the market tanks?
As I read this I couldn’t help but think, “I wonder when he is going to point the wisdom of including annuity income as part of each client’s portfolio.” The author expresses great concern that he assures his clients that he will do everything possible to keep them from running out of money. But, hey; no guarantees.
It is a fact that only the Federal Government, an insurance company and a lifetime annuity can guarantee the client will receive the most income with the least stress regardless of the rate of return…and guarantee it for life. By omitting that option the planner must deny the client income they otherwise could spend so that they can stick to the 93% “probability” of success. What should we say when 93% probability turns out not to be good enough, or the client suddenly needs to spend an extra $6,000 – $10,000 a month for long-term care during a down market and for an extended period of time. I checked and found that the nursing homes were still over 90% occupied from Jan. 2008 – Dec. 2010. I hope none of his clients were among the residents.
He expressed concern about “shedding AUM” in a broad down market and having to scale down services. I am concerned about the clients who are sharing that risk and must scale down their standard of living.
Thought (a little story) for the week:
I met a couple at a charity banquet who, when I mentioned I do retirement planning, asked me for my opinion of a recommendation they were considering from a financial advisor. They were both a little over 65 and they have “somewhere around $1million” in his 401(k) and other funds and income from Social Security. He was having trouble “pulling the trigger” on the “conservative” portfolio being proposed. As he tried to describe it, it sounded to me like a reasonable (and typical) suggestion for a couple their age but he was still unsure and she was very unsure. After only a couple of questions I got an idea of their concern. “Are you concerned that your assets could go down and you worry about running out of money? I asked. He admitted to being somewhat concerned about that and she wasvery concerned.
I asked him, “has the advisor suggested a personal lifetime pension to guarantee income as long as either of you are alive?” You guessed it. Annuity income had not come up. When I told them they could probably get income for life of about 6% per year, his wife quickly did the math in her head and said that would be about 50% more income than the advisor was suggesting.
As we had been called in to dinner I had only time to mention that I wouldn’t suggest putting all of their money in an annuity. But perhaps they should consider enough to cover their basic expenses of housing, food and utilities. I got the clear impression that would significantly improve their chances of pulling that trigger on the rest of the money.
She said she was going to ask the advisor how much his plan was guaranteed. I asked if he had said anything about preparing for long-term care. He rolled his eyes and she just shook her head and seemed a little angry. I’m thinking at this point, they may be “pulling the trigger” on him unless he can come up with something for them that offers a lot more security.