Thought for the day:

When a man opens a car door for his wife, it’s either a new car or a new wife.
– Prince Philip

If you will read no further:

Financial planning for the retiree is much different than for the younger clients trying to build their wealth.  Average rates of return make sense to them as you grow their portfolio.  In retirement it is about sequence of return.  If you use averages to create your plan design you stand a very good chance of disappointing your client.  Look how an index annuity overcomes sequence of return issues.

Thought for the week:

I read last week in one of the financial newsletters I get that insurance products are soon to be the HOT financial instruments of the next 20 years as the markets settle in to a volatile, modest yielding period and the boomers are looking for predictable pensions and dependable health care resources. This sounded familiar to me as it is what I have been saying for several years.

But many advisors still ignore that idea and invest their clients’ money as if it were the eighties again. One advisor recommended including a non-liquid limited partnership to a couple I know who wanted as much guaranteed lifetime income as they could get. This couple had modest resources and had been keeping almost half of their 401(k) money in money-market accounts for the past 3 years, not wanting to risk it “going down again like it did 2008-09”.

To his credit, he also recommended an annuity for steady income from the 401(k). But instead of choosing a fixed SPIA that would have total guarantees for life, he recommended a VA using a GIA with competitively high income. However he either didn’t know or failed to disclose that the income would be reduced if/when the investment account value went to zero. With 3% combined fees plus “investment restrictions” the fund would have to earn almost 9% EVERY YEAR to break even. One bad year and the fund would most certainly be depleting almost every year thereafter.   Annuities are an important part of a retiree’s secure portfolio, but you must know how to choose properly or you can put a client at great risk later in life when they can least handle it.

Many advisors ignore LTCi planning assuming their clients will have enough money to self-insure; that if you commit the same premiums to a solid investment program, by the time you need LTCi you will have plenty more money to pay for it without buying insurance. It’s difficult to argue with that advice, since the planner most assuredly knows precisely when his clients are going to need care and will certainly be able to grow their money accordingly.

One planner who gave that advice to a healthy single female (age 63) was referring to a TLC policy from Genworth. He felt that by investing $100k at a “pretty secure” 7% (6% after his fees), by the time she reached age 85 (that’s when he determined she would need it for care) the account would worth $360,000 gross and $270,000 after taxes. That’s assuming the market wasn’t in a “funk” when she needed to take money to pay for care.

He simply ignored the fact that the day after she puts the money in, the TLC policy is worth $238,262 if she dies, and $557,622 at the rate of $93,000 per year whenever she needs long-term care all tax free and no matter what the stock market happens to be doing at the time. Can you imagine what it did to a client’s portfolio who had to begin drawing down about $8,000 or $10,000 per month beginning in 2008? What about the next downturn….or don’t you think that will ever happen again?