Thought for the day:

“Leadership is a potent combination of strategy and character.  But if you must be without one, be without strategy.”                              Norman Schwarzkopf

If you will read no further:

There is a reason why our annuity sales are growing each month.  More and more advisors are discovering that their clients want to minimize the uncertainty they face day to day in retirement. The only way to maximize retirement income is to be able to spend all of their assets by the day they die.  Since no individual advisor can guarantee to accomplish that, we must rely on the insurance companies (the only institution that knows statically when death will occur) to get the job done.  It’s called a pension (also known as an annuity).  I guarantee if given a choice between certain results and uncertainty more and more of our clients will be opting out of the latter.

Thought for the week:

Last week we reflected on the increase we are seeing in life insurance, particularly Index Life Insurance set up to provide an amazing alternative to a Roth IRA; max funding a life insurance policy where the cash value crediting rate is equal to the annual increase in the S&P (up to 13%) each year so that a young family can have significant life insurance protection and our client can look forward to significant tax free retirement income.

But now what to do with clients who have a modest portfolio and must retire with sufficient income to cover their basic living costs now and in the future.  This is also the client probably least interested in much risk and volatility as they have little downside margin to play with.  If your practice is primarily funded by gathering assets, you might have a slight dilemma here as you want to take charge of his portfolio, but it’s difficult (impossible?) to guarantee the results. You need the most income at the lowest risk.  Enter the Annuity Ladder.  Read more

Assume we have a couple ages 65 that have accumulated $600k in their retirement portfolio.

Step one is to determine the monthly shortfall between their social Security income, Pension income (if any), and basic living expenses; housing, insurance, utilities, transportation and food….and taxes. I don’t think I am going out on a limb to assume most people prefer a monthly income that will cover that amount free of risk or uncertainty.  Suppose that shortfall is $1,500 per month.  The chart at the left says that they can receive about 7% per year income, guaranteed for life. So $250k to $300k of their assets should be used to purchase a joint annuity.  That leaves $300k that can be invested in a managed portfolio designed to grow in a manner commensurate with their risk tolerance.

At age 75, the portfolio (which certainly you can grow at 6% net) will now be worth $537k. If needed/desired, another $150k can be used to purchase a new annuity to provide another $14,000 per year of income.  The remaining $380,000 can continue to grow so that by age 85($680k) they can use $180k to purchase yet another annuity that will add $20,000 more per year.  Total annuity income by then will be $52k per year, up from an original amount of $18k at age 65.

Over their retirement years their portfolio has generated $665,000 of secure, no stress income and left a legacy of $638,000.   All income is 100% risk free*

Of course all these numbers except the annuity rates are hypothetical, and each situation would be done a little differently.  The idea is to use part of the retirement portfolio to get as much secure income as possible.  Then you can invest the rest of the money for future needs and inflation.  Investing some of the money in a linked-benefit policy for long-term care would be perfect for these folks and on policy could cover both of them.

By the way, if you think getting 6% net for the client is a little too ambitious, I wouldn’t argue with you.  That is all the more reason why they need a layered Annuity Strategy.

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