Frankie and Linda are like family.  We met in 2011 when Frankie was doing what most of you are doing, trying to find the right way to distribute retirement assets.  They had made the rounds through several online salespeople and contacted me for an opinion on some of the offers they had seen.

I talk a lot about the risk spectrum.  On one end is money in the bank and on the other end is market investments that go up and down in value.  Most people fall somewhere in the middle, wanting to protect some assets but also hoping for long-term growth.  I’ve met people who go to either end of the spectrum with everything they have and it’s a matter of personal choice so that’s fine with me.

Frankie and Linda fall squarely on the conservative side of the spectrum and that’s why they were looking into using annuities in retirement.  After making the rounds and looking into several different options they honored me with the job of helping them put assets to work.

Well like everyone else I keep in regular contact with clients, some more than others just depending on personal needs.  Frankie and Linda have been actively reinvesting as certain allocations mature so their money has always been safe and always at work.  We speak a lot because they are very proactive about getting the most from their money and never taking risk.

We spoke this week because Linda has some funds maturing this summer and Frankie is looking for some ideas.  I looked into the accounts to see where it’s at and we were both pleased to see the value of current holdings.  In 2012 they were sitting with a combined $500,000 in 401(k)s and as of yesterday it’s all worth just over $763,000.  Over a period of seven years that amounts to more than 6% annualized return, all without risk of loss.

Back in 2012 the stock market had fully recovered from the losses in 2008.  Everyone was still nervous about the market dropping again and anyone at retirement age, like Frankie and Linda, were justified in protecting assets.  Sure the market has roughly doubled over that time period but it’s easy to pick winners in hindsight.  And there’s nothing wrong with a 6% yield with none of the ups and downs that were all part of the market getting to where it is now.

Everyone is going to want to know, what specifically did they do?

Well the full picture is complex because we’ve been working on it for more than seven years but I can give you a general idea.  The placement of their assets pretty much follows my evolution of recommendations as a result of a difficult interest rate market over time.  The most important point of their plan is not just the specific assets used but they flexibility they have had for reinvestment

Back in 2011 I sold a lot of structured settlements because of higher rates available on the secondary market.  Frankie and Linda needed an income stream so we were able to place several secondary annuities that would give them a discount on the initial purchase.  They did more with their money at the beginning but that’s not what made it work.

Frankie decided to go back to work for a while so he saved a little more money and didn’t officially retire until they started collecting social security.  Since they live within their means none of the income we put in place was needed so they continually reinvested in short-term deals to ladder investments and always have funds available if rates rise one day.  They used a series of fixed and indexed annuities with one maturing this year and another next year.  Plus the unused income stream provides steady available cash for reinvestment so flexibility in the future is optimal.

No one can predict the future and there’s one thing I say all the time that Frankie and Linda do better than anyone else.  Take the best deal available today but make sure you have the option and ability to make changes if better opportunities arise.  They have never been afraid of simply putting money to work in the best option available.  The result speaks for itself.  Not all of their assets have done better than 6%.  Some have returned higher and some lower but their diligence in identifying opportunities and acting on them is what produced the result.

Oh yeah, and there’s one more thing.  So many people question me about fees and feel like I’m holding back some hidden information.  Well Frankie and Linda do pay some modest fees.  They both have a self-directed IRA and the custodian charges $295 annually for each account.  So on $763K of assets they have combined fees of $590 per year.  No other fees of any kind apply whatsoever.  That’s less than 1/10 of 1% for anyone who wants to do the math.

Everyone knows I promote the Flex Strategy and I tell all who ask that it takes a different form for everyone who uses it.  There’s no single way to do it but the point is to maximize safe assets and maintain control of your money so you can take advantage of new opportunities when markets change.

Next week I’m going to share with you a complete overview of all the benefits of approaching retirement with the Flex Strategy.  Since I talked to Frankie yesterday I thought it would be a better idea to show you how it worked for some of my clients.

If you have any questions feel free to call, email or leave a comment below.

Thanks!

Bryan

800.438.5121

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If your goal is to never pay taxes again then converting qualified assets to a Roth IRA is one way to do it.  But if you really just want to pay the least amount of taxes over time then it may be best to leave your assets right where they are and adopt a different strategy.  In reality there are only a few specific situations where a tax-free conversion works.  I’ll explain first why it doesn’t work for most people and then give you a couple examples when it can work well.

First a disclaimer:  This post is meant only to provoke general thought and conversation in regards to an oft-promoted retirement strategy and should in no way be construed as tax advice or a specific recommendation on any particular tax strategy.  You should consult a competent tax advisor in conjunction with any retirement plan that includes conversion of a Roth IRA.

When a conversion happens all the money coming from an IRA is counted as taxable income on top of any other income you receive.  With our progressive tax system, the more money you make the higher taxes you pay.  Converting large sums of money to a Roth puts you in a higher tax bracket which may have you paying more in taxes than if you withdrew smaller amounts over an extended period of time.

This was certainly the case with Mike, who I met with last year.  He had a few years until retirement and thought a conversion might put him in a favorable tax bracket.  His goal was to retire in a 15% tax bracket and he was planning to spend the last three years of employment to get half of his IRA converted to a Roth.  If so his retirement withdrawals would eventually be taxed at half the rate as otherwise.  The problem is that the last few years of retirement are his highest earning years so a six-figure conversion would have him paying taxes on those fund in one of the most aggressive tax brackets.  It amounts to paying a significant premium for a small benefit down the road.  Plus, given his assets and income goals I calculated him to be just under the 15% threshold without doing anything so a conversion would add unnecessary complication since his goal was already attainable.

A similar situation happened with Candace who retired at 63 and needed to supplement social security with $30,000 per year from her IRA.  She thought it might be a good idea to convert an additional $100,000 per year to a Roth so at age 70 there were no RMDs and income from that point would be completely tax free.  First of all, $30K per year as her only reportable income puts her in a very low tax bracket.  The additional $100K conversion annually would have her paying taxes in a much higher bracket on the whole thing than if she just left it alone.  Plus during the time period of the conversion her social security payments would also be taxed at the highest rate which brings the cost up a touch more.  If she simply leaves all assets in the traditional account she will be able to meet RMDs, remain in a low bracket and pay a very modest amount of taxes each year.

The above two scenarios in a general sense fit the objectives of most people I know.  There are situations where the conversion works but those are more specific and I’ll explain below.

Richard has a sizeable portfolio and a modest retirement expenses.  He has lived within his means which helped him save a substantial sum.  Social security covers all his needs and he doesn’t like to spend money, preferring to manage his assets and leave them to his kids.  In this situation Richard has no taxable income so he can convert a fair bit of assets annually while staying in one of the lower tax brackets.  A Roth is superior to a Traditional IRA for inheritance purposes so he made a strategic decision to convert gradually to maximize the benefits.  His prudence and discipline helped create a nice portfolio so I have no doubt he possesses the perseverance and aptitude to make it happen.

In another scenario when it works, Charles retired early with a disability at age 60.  He has a private disability policy that pays until he is 65 and that income is tax-free.  For the five years he is receiving tax-free income he can gradually convert to a Roth IRA without paying high taxes upfront.  A similar strategy can be used when non-qualified investment losses can be deducted to offset additional income.  In either case conversions can be done while staying in a relatively low tax bracket.

A few of my clients use a different approach and I recommend it as an option for anyone who likes the idea of having more assets in a Roth IRA.  The maximum contribution to a Roth for anyone over age 55 is $6500 in 2019, or $13,000 when each person of a couple does it.  I’m also fairly sure that rate will rise over time, allowing for even greater contributions in later years.

Pulling an additional $13,000 from a Traditional IRA every year will not substantially affect taxes and if consistent contributions to a Roth average even 4% yield then there would be nearly $400,000 in the account after 20 years.  It provides a nice base for inheritance or tax free withdrawals in the later years of retirement.

So I’ll ask the question again.  Do you want to never pay taxes again, or pay the least amount of taxes over time?  If you are looking for a strategic advantage there first needs to be an advantage.  In most cases a significant Roth conversion is not the most profitable strategy.

As with everything else it comes down to an individual decision and variables are different for everyone.  If you have questions about whether a Roth conversion is the right approach go ahead and call or click below to make an appointment.

All my best,

Bryan

800.438.5121

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It dawned on me last week that I’m giving people advice and competing with other advisors who are just trying to make sales.  There’s a big difference between the two.  No one likes the hard-selling guy who only emphasizes the positives without mentioning potential negatives.

In fact, most people end up finding this site while trying to determine if a sales pitch is legitimate.  As much as everyone hates it, lots of people still end up falling for it.  Most of the people who contact me via phone, email or appointment mention regretting a past decision regarding annuities.

One of the clearest indications of this is in a short email I received a couple days ago.  You all got the same email where I simply try to confirm you received the information you requested.

This person responded by saying, “Yes. I will look it over but my wife already has an annuity so she is not thrilled with the idea of getting another one.”

My response?  “No worries Pete- it’s free information and you are not obligated to do anything.  I hope you find some useful ideas.”

Someone sold these guys an annuity and for one reason or another they are not happy about it.  There’s also a vague indication that he feels as though I might try to sell him a second contract.  I know nothing about the guy and can’t tell if the first annuity is the right thing for him let alone whether it’s worth my time and effort to try and sell something else after a bad experience.

Learning the difference between sales and advice will give you a substantial advantage while you evaluate various strategies for asset management in retirement.  Sales consist of highlighting features of a product or service in hopes of getting a buyer to commit.  Advice centers around finding solutions to a problem that are in the best interests of a consumer.

Oftentimes sales start by creating a problem in order to solve it with a specific product.  You should avoid anyone who first tries to complicate your life right before they recommend fixing the non-existent problem with something you don’t really need.  Most of the mistakes people make are the result of a similar strategy.  Advice provides justification for a particular strategy over another.

I’m not a very good salesman so I have been skeptical of the classic sales pitch since my entry into the financial services industry.  That’s also why I almost quit about ten years ago.  I got tired of being told to sell a new product because of a specific feature.  I was told things like, “call everyone on your list and tell them about this new idea.”

Every product or strategy has a drawback but it’s not because of a negative feature in the product itself.  A person’s individual situation is what makes it work or not.  A Tesla is a great car but it won’t tow my horse trailer so it would be a waste of money for me to buy one.  Yes, a few people have tried to convince me to buy a Tesla but it won’t be relevant for me until they make one with the towing capacity of a diesel truck.

Advice comes with a focus on what you want and need.  More time should be spent trying to understand where you are in relation to where you want to be.  Finding strategies based on sound advice takes time and patience.  Sales happen fast without regard for specific variables that may qualify or disqualify the product for a given individual.

Some of you may remember a past newsletter I wrote:  Some People Don’t Need Annuities.  Go ahead and click the link if you’d like to read it.

The point of that post was to illustrate an example of my process.  Good advice gives you different options to reach your goals.  And I don’t mean just different annuity options.  I mean different asset classes, all with specific benefits or disadvantages so you can decide which option is the best.

My process centers on the five keys of retirement, which are:

Income– First determine the amount of necessary and/or discretionary income a person needs in retirement

Market Volatility– Then find the amount of growth needed in the portfolio to meet goals and limit fluctuations in value depending on personal risk tolerance

Inflation– Position assets in a way that enables you to adjust spending levels in retirement

Control– Promote strategies that keep a person in control of assets throughout retirement so changes can be made when needed or as better opportunities arise

Legacy– Some people like the idea of leaving money to the next generation or a charity while others don’t mind the idea of bouncing the last check they write

Every individual has a unique feeling about each of the above variables and each person places more importance on some more than others.  How you approach one can have a dramatic effect on another.  The amount of assets you have and the number of years until retirement will also provide a foundation for realistic expectations.  When it’s all said and done there are literally hundreds of results to the above formula.

Until this is figured out there is no way to determine whether an annuity is what you need.  That’s why the guy who buys dinner for 30 people and tries to sell the same product to everyone should not be taken seriously.  It’s the most obvious type of sales pitch and it won’t do you any good.  The sample trays at Costco might be a good way to sell boxes of frozen food to random people but the same tactic is no way to influence people in regards to major financial decisions.

Sound financial advice results in good relationships and sales put people in a defensive position from the beginning.  Nothing good comes from that.  When people are defensive I can hear it in their voice.  The conversation usually starts with those people trying to convince me why they shouldn’t buy an annuity.

So you all need to know that I am available if you want some advice about your situation.  But if you expect me to jump in the mud with all the others who are competing for numbers then you have the wrong guy.  I’d probably make more money doing it the other way but that’s not my style.  Those who know me would agree.

Bryan

800.438.5121

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Everyone either asks about it or thinks about it.  Journalists write about it and competitors criticize it.  Annuities pay commissions to the agents who sell them and that’s just how this part of the industry works.  It’s ok to be concerned about this because the amount of money a salesperson gets does make a difference in the products and options you are given.

I’ve met agents in the past that refuse to sell anything that pays less than 8% commission which clearly shows a person who is primarily focused on self-gratification.  Not everyone is greedy even if the critics claim that anyone who sells an annuity is only in it for the money.  But there are very few people who put the importance of consumer value at the forefront of a proposal.

If you want to understand how commissions affect the products you see then you have to understand first what the pot looks like and then see who has a hand in it.  Agents are not the only ones who control product options and in a lot of cases that’s the main reason why so many people sell certain products more than others.

The source of the issue is what’s called Insurance Marketing Organizations (IMOs).  Most insurance companies have outsourced their sales and marketing departments to third party companies like these that handle product distribution and assist agents with consumer sales.  The payoff comes in the form of additional commissions paid to the IMO on top of what’s paid to the contracted agent.

It’s a necessary evil on this side of the business and I don’t feel as though IMOs add any value to my business and definitely don’t add value for the consumer.  Essentially what this means is a third party determines in part what contracts are appropriate for your situation.

IMOs compete aggressively to get an agent’s business.  I get three or four new calls every week with offers of free leads, fancy vacations or extra commissions and bonuses if I switch to the other company.

I get more pitches than you do which is one of the reasons why I don’t call people endlessly.  I understand what it’s like to have someone relentlessly bother me for business.

Incentives offered by IMOs are too numerous to list but for purposes of this article I’m going to focus on additional commissions.  Products with the highest commissions are usually the flashy ones with a big bonus and longer surrender periods.  The agent gets what is called street-level commission and the IMO gets an override.  Some overrides are bigger than others and typically that additional compensation comes alongside the products with big street commissions.  IMOs have no direct responsibility to you so money rather than ethics dictate product recommendations.

Bigger overrides mean a better bottom line, or more money to entice agents to do certain types of business.  You can call it my opinion but I am positive this is the reason why some annuities are more widely used than others.  I’ll give you an example that will make it pretty clear.

Allianz is a company I pick on a fair bit mostly because the motives are obvious.  They have a list of annuities that are considered “preferred products.”  In order for an IMO to distribute products from the preferred list they need to be able to hit some pretty high sales targets.  The benefit of selling Allianz preferred is that Allianz does not allow an IMO to share overrides on those products.  So when an IMO gets an agent to sell preferred there’s more money in it for the IMO and the high distribution requirements mean they push those products hard.

An exact reason why those products are so widely distributed is because that’s what the IMO wants agents to see for the two major reasons mentioned above.  I’ve met a lot of advisors who say those products are the only options they have to sell.  If so they are working with the wrong IMO but at least you can begin to see that it can be just as hard for agents to find good products as it is for consumers.

I had the same problem several years ago when I first started investigating index annuities.  The IMO I was using limited my options to one or two companies they had a good contract with.  As a result I wasn’t able to recommend a truly unbiased product recommendation.  It didn’t take me long to figure it out so I fired the IMO and decided never again to take their suggestions as fact.  Rather than rely on them to educate me I opted to pay for access to a database of all products so I can see the entire market and use a detailed search to identify the best value.

I’ve always believed that a small percentage of something is far better than a big percentage of nothing.  After looking at my books from 2018 I can see that my average commission was just under 4%.  It’s not that I’m better than anyone who sells for bigger commissions, that’s just the result of being involved in competitive situations and keeping the focus on finding the best solutions for people.

Commissions will always hold some people back from making a big purchase but it shouldn’t.  Someone makes money off of everything you buy so it’s up to you to make sure you are getting as much value as you can.  The cheaper it is for a company to manage an annuity contract, the more you will get out of it.

Large commissions happen to come along with the most commonly sold products and that is part of the reason why I spend so much time trying to get people to avoid them unless it’s an absolutely perfect fit.  Making strategic financial decisions based on fundamental analysis will allow you to naturally find the best contracts with the most benefits.  For those of you willing to look a little deeper at that type of approach, the result will be a more profitable retirement.

All my best,

Bryan

800.438.5121

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It’s time to set the record straight.  After hearing this in the vast majority of my meetings so far this year I have realized that the industry mantra has permeated the subconscious of most retirees.  Since my strategies focus on how to enhance performance in comparison to lifetime income products, I often take for granted that people who find me are looking for an alternative.

The traditional approach of using guaranteed income to cover basic needs in retirement is not the only way to go and I pointed that out several weeks ago when I wrote about The Problem with Guaranteed Lifetime Income.  But the point still seems to be not getting through because people keep saying, “I thought annuities were only for income.”

So if you are shopping for the highest payout rate or trying to find a way to game the numbers, I’m sorry to tell you that I’ve already done it.  From immediate annuities to variable I’ve seen them all and know exactly where each one is the right fit.  The goal is to compress the research process so you don’t spend as much time trying to find the answer as I did.

But apparently I have not put enough emphasis on one detail that is fundamental to the search for the best retirement plan.  Annuities are not just for income.  Annuities are for protection.

Variable annuities will protect you from taxes…

Fixed and index annuities protect you from market volatility…

And income annuities protect you from longevity…

Most people are looking to produce income so all products have been given components that allow for guaranteed income in addition to the core benefit each provides.  That’s right, income benefits were added to most annuities you will see which means something existed in the contract before income was there.  That’s where I focus my attention because the core benefit is where you’ll find the best use.

Really it’s all about longevity risk.  That’s the risk of outliving your assets because of unknown life expectancy.  Providing income in retirement is all about insurance and good insurance is expensive.  That’s exactly why guaranteed income may not be the best deal.  If you’ve saved enough for retirement you can avoid the steep cost of insurance and worry more about true profit.

Instead focus on safety, yield, liquidity and a shorter contract commitment so you have flexibility to make changes to your plan.  The aforementioned benefits are all things an annuity can do without a fee or lifetime commitment.  It’s not about income, it’s about protection.

The proof of this approach goes back to my “Five Keys of Retirement”.  It’s the foundation of the Flex Strategy that shows how focusing on a single goal in retirement will limit your output and future planning options.

The Five Keys Are:

Producing Income

Decreasing Market Volatility

Mitigating the Effects of Inflation

Control of Your Assets

Leaving a Legacy

The guaranteed income only approach is going to leave you exposed in certain areas.  Many of you might remember the green thumbs up and red thumbs down.  It’s what I used as a graphic in the webinar to show how certain retirement strategies help plan for the five keys.  Most traditional plans and products show deficiency in two or more areas.  The goal is create a plan with five green thumbs up so you know all the risks have been eliminated.

Remember that an annuity is not just for income.  The basic benefits provide what most people need and do so without the cost and time commitment of expensive insurance.

The traditional income approach works for some people but not others.  My approach works for people who want or need to produce more and keep control of their assets.  If I send you a proposal it means I have looked at all the other options and know what I’m showing you is the best.  If you’d like to revisit our previous discussions about your plan then please reach out.

Have a nice weekend…

Bryan

800.438.5121

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The point of this whole operation is not just to sell as many annuities as possible.   A lot of time and effort goes into making sure people don’t make mistakes and that results in me not selling annuities most of the time.  Some people get it and some people don’t.  Annuities work for some but not others.  Some sales are easy and some take a lot of time and effort.

Last week I thought I had a really easy sale coming my way.  My dad needed help setting up a living trust so he could organize his assets.  I have five siblings and this will make things a lot easier than just hoping we all agree on something.  Many of you have had good or bad experiences with the issue so it’s something I recommend to all clients.

Part of what he needed was an investment idea for a fair bit of cash he has set aside over the years.  He has little experience with the stock market and is one of those people who really doesn’t spend any time thinking about how much money he can make.  Simple and conservative is his wheelhouse and there aren’t a whole lot of options.

Kim Anderson spent a 42 year career as a school administrator in Montana and Wyoming.  Two modest pensions and social security allow him to easily cover expenses with plenty of extra cash each month for discretionary spending.  He also has supplementary health and long-term care insurance so is well prepared for the big emergencies in retirement.

With plenty of savings and positive cash flow he is in a perfect spot to do about anything he wants.  He should invest some money and get more growth, right?  Yes he should and based on his limited experience a simple fixed contract would be a good way to increase yield.  Dad knows I’m in this business of course so he directly asked me to find a place where he could put a couple hundred thousand dollars.

Well he’s my dad and I really like the guy and would never steer him wrong.  I know this market and how to find a nice easy deal that yields well with no complication.  But I’d never take him for granted and just assume he’ll cut a check and send it wherever I tell him.  So I made him go through the same process as anyone else to find the need or justification for giving him a retirement product.  That’s how we settled on creating the trust before anything else happened.

During our conversation we talked about how he is planning to spend his time in retirement.  Currently he is getting ready to move back to our small family farm in the Bitterroot Valley so he can raise a few cattle and plant a big garden.  My grandmother and his mom is alive and well at age 89.  She lives alone of the property and needs some help.  Since my dad built the house back in the 70s there is a family connection he wants to keep in place.

Grandma needs help to keep the place in good order and it will provide him the opportunity to putter around on a little farm and do what he loves most.  But Kim has siblings too and they have an equal right to the property where Grandma lives, and she won’t be around forever.  Kim’s plan is to buy his siblings’ share of the property but won’t do anything until Grandma is gone.  Otherwise she’ll think they are trying to push her out.

So with a big need for cash coming at an undetermined time in the future he needs to be fully liquid.  He can’t risk losing anything in the market for the time being and no safe asset will give him the flexibility to make the purchase when it happens.  Real estate considerations play a big part in many retirement plans.  Some people upgrade or add a second home and some people downsize to cut cost and free up extra cash.

My advice is the same for everyone.  Money needed for major purchases within a few years should be kept safe.  There’s not enough time for real growth no matter what yield you get so it doesn’t make sense to risk not having fund available exactly when you need it.

For now, Kim needs to focus on his tasks around the farm.  When the snow melts he’ll go to the stock sale, buy some steers to finish and plant some raspberry bushes.  He will continue saving money and eventually buy the old house.  When that happens he will then be in a place where he can look at investing some assets for long-term growth.

Part of him thought that I didn’t want to deal with him because he doesn’t have that much money but that’s a long ways from the truth.  He understands it differently now that I explained why liquidity is the biggest issue for him.  I also told him that I spend my time solving problems that he doesn’t have.

He has adequate savings and monthly income plus insurance to cover contingencies.  He is simple and would rather trust me than spend a lot of time researching products and financial strategies.  For that reason I chose not to sell him an annuity.  He wanted me to make the decision so I considered all factors and determined it’s not what’s best for him right now.

I only sell annuities that solve problems and improve financial security and opportunity.  Whether it’s my dad or anyone else, I won’t recommend any strategy unless it’s the right thing to do.

Enjoy your weekend…

Bryan

800.438.5121

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Long considered to be the benchmark for ethical behavior in the financial services industry, the Certified Financial Planner (CFP) designation is thought by many to be a necessary qualification for anyone who gives financial advice.

The CFP designation does not, however, exempt anyone from criticism who implements a retirement plan that is poorly conceived and woefully inadequate.  CFPs after all are human and no more capable of competence than anyone else just because they spent a little money and took a test so they can have some initials on a business card.

Before I go any further please let me state that I know hundreds of professionals in this business with all sorts of specialties.  The person behind the credentials is what’s most important.  Whether it be CFP or any other standard, there are those who know what they are doing and those who don’t.

And now for the plan…

I met Roger last week.  He had signed up earlier this year and read some information that has him questioning the plan he put in place two years ago.  He is retiring this year and in addition to social security would like annual income of $60,000 with an additional 1%-2% yearly increase for inflation.  His total assets were roughly $1M in 2017 when a CFP assured him of a conservative plan that would take care of it all.

1/3 of Roger’s money would be put in a commercial cash account paying 3% and 2/3 of his money would be split between three deferred annuities.  One annuity would be used for conservative growth and the other two deferred for ten years to provide lifetime income.  After hearing the general details I was immediately scratching my head.

Allow me to break it down into more detail but remember this is a close approximation and not perfect to the penny.

Cash Account:  $340,000

This is meant to provide income from 2019 thru 2025.  If the yield is 3%, principal and interest payments over six years would come to roughly $5100 monthly.  So that part meets the income goal but in the first six years of retirement, 1/3 of assets would be gone.

Annuities:  $660,000 split three ways

• Midland National Endeavor 8 – $220,000
  1. Safe growth until the end of the surrender term in 2025
  2. Reasonable projection is growth to $300,000 in eight years
  3. Plan calls for taking proceeds and buying dividend paying stocks
• Midland National IncomeVantage – $220,000
  1. Guaranteed lifetime income starting in 2027
  2. Projection shows income of $21,000 annually after ten years
• Allianz 222 – $220,000
  1. Guaranteed lifetime income starting in 2027
  2. Projection shows income of $20,000 annually after ten years of deferral
  3. The CFP actually quoted higher income figures but I consider those to be ridiculously overstated so I am giving this the benefit of the doubt and projecting income numbers that are very high relative to all the 222 illustrations I have reviewed

Below are the issues I have with this plan.

• 1/3 of assets are spent after only six years with likely 20 years of retirement left
• The first annuity becoming surrender free in 2025 cannot all be spent on dividend paying stocks. For two years until 2027 there is an income gap and over $100K of the proceeds need to be spent to bridge the gap if I offset the $60K annual goal with the average stock dividend of 3%.
• In 2027 there would be $200K in stocks paying $6000 annual dividends and a combined income from both annuities of $41,000 for a total income of $47,000 annually
• In the best scenario this leaves Roger $13,000 short of the annual income goal with no plan or prospect for inflation adjusted income. Assuming a 2% inflation adjustment, by 2027 his income goal would be over $70,000 annually so that results in an even bigger gap.
• After 20 years of payments, Roger will be 81 years old and the above would provide him with a total cash flow of roughly $850K. There would likely be a remainder of some dividend stocks and two annuities would continue paying $41K per year but from a yield perspective he does not really start making money until he is over 80 years old.

To me, the first 1/3 of the assets was wasted in order to sell a couple of deferred income annuities.  Future success is going to depend on performance of the growth annuity that matures in 2025 and the Allianz 222 needs to wildly exceed expectations.

The major fault of the above plan is not with any specific element but rather the entire plan as a whole.  Roger’s withdrawal rate amounts to 6% of his total assets which is quite high so he needs real growth and no element of the plan allows for that.  On the flip side, with a high withdrawal need you can’t afford much risk either.  There is no answer that is guaranteed to be right.  But it is without a doubt wrong to risk it all or lock it all away in safe assets.  It can’t be all or nothing one way or the other.

There’s no doubt many of you would like to know what I would have recommended.  Well like I said above he needs to have a growth element in the plan.  Two years ago I was saying the same thing I’m saying now so there’s no doubt this is what I would have recommended.  He should have put half his money in a couple annuities meant for security and conservative growth and the other half in low-cost index funds tracking the broad stock market.

Everyone knows I like to run two different scenarios, one based on the worst 20 year market period and one based on the last 20 years in the market.  The worst case scenario is something of a stress test that indicates a maximum amount of protection that is required for success.  The last 20 years simulates roughly average market growth but with a few periods of volatility that justify protecting assets, especially during the withdrawal years of retirement.

If I match the income distributions from the CFP’s plan, the worst case scenario is managed with a remainder portfolio value of around $700K at age 81.  The last 20 year scenario obviously performs better and shows a remainder value of over $1.5M which would give him room to increase his income to the desired level and even provide for the inflation adjustments he wanted.

One obviously can’t bank on the second scenario that shows substantial portfolio growth.  It needs to be approached conservatively and changes for the better can be made after performance is proven.  Split the difference between the two remainders and you’ll get $1.1M.  So I’ll use that and say the income goal of $60K annually is possible and inflation adjustments can be made on a discretionary basis depending on performance.

So what should Roger do?  That’s a hard questions to answer and I’m working on it.  His worst-case scenario is $47K per year but there’s really no upside.  He may be able to improve his position by annuitizing the deferred annuity that matures is 2025.  That would get him close to $60K after 2027 when the others start paying but will leave him with a larger income gap for those two years that he may or may not be able to absorb.  Without real growth in the plan there aren’t a lot of options.

It’s likely going to come down to adjusting spending levels in the early years in order to preserve some of the cash that was tagged for early withdrawal.  There is also the chance that he can use the annuities he already has but with a strategy that is similar to what I promote.  There are two problems with that.  Income annuities do not accumulate as well as growth-oriented annuities.  And there’s no real growth element for maximum accumulation so this may not work.  He would need both to make this successful.

Roger called because he has doubts and may consider surrendering his annuities.  I don’t feel this would be the best option since taking a loss is almost never in someone’s best interests.  Most likely he should deal with the plan he has but continually monitor it to see if growth in the contracts and changes in market conditions present a better opportunity.

When I heard he had a plan designed by a CFP I expected to see a mix of bonds, dividend stocks and long-term growth funds.  That’s a standard asset management recommendation for someone with a high income goal.  I did not expect to see a mix of no-growth cash and deferred annuities that were shoe-horned into his situation.

My advice to you is set reasonable goals and settle for nothing less than a plan that gives you the optimal level of protection and growth while preserving your options for re-balancing and making changes for future planning needs.  The optimal annuity plan that covers all contingencies is simple and effective.  If you’d like to see how it works in your situation or how it compares to plans you’ve seen then please reach out.  You can call, email or make an appointment below.

Talk to you soon…

Bryan

800.438.5121

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During meetings people frequently comment that they know I don’t like guaranteed lifetime income.  I guess I do understand why people say that since most of my writing and advice centers around finding the best deal and guaranteed lifetime is only the best deal in a very specific situation.

So it surprises me to know many people get the message that I don’t like it because that’s not the type of message I’m trying to spread at all.  The insurance industry survives on long-standing principles of security and consistency.  The push to sell guaranteed income to baby boomers is an attempt to capitalize on a person’s fear of running out of money in retirement.

Running out of money in retirement is a real concern and my aversion to using guaranteed income products in most scenarios doesn’t mean I don’t think it’s important.  It’s more a matter of adjusting to current market conditions.  Today’s market conditions show that income products are not the best deal.  Again, it depends on an individual situation because it can still be the right choice but everyone needs to explore all options for making that big a commitment.

The truth of the matter is that I love guaranteed lifetime income.  That’s why I’ve worked so hard to make it even better than the industry says it can be.  Below I’m going to give you all the reasons why you should consider an alternative to the standard approach of producing income in retirement.

Age:

Most of the people I work with have an average age somewhere in their mid-60s.  Payouts for lifetime income are best when the buyer is in his/her mid-70s.  This puts most people in the market to buy when it’s not the best time to buy.  If this is you then you need to explore a short-term strategy that protects assets but gives you the option to change the plan when better opportunities come available.

Interest Rates:

I’ve said this hundreds of times and I’m not quite sure it sinks in.  When rates are low you want to be a borrower, not a lender.  When you buy lifetime income you are essentially loaning money to the insurance company in exchange for payments.  Your money is stuck at today’s interest rates for up to 30 years in many cases.  The realistic choice is to hold off on long-term commitments so if rates rise you can wait to lock in when it’s a much better deal.

Cost:

Because most people are shopping too early and interest rates are low, the cost of buying guaranteed lifetime income is prohibitively expensive.  Look at it this way, the average income contract takes a minimum of 18 years until the buyer breaks even.  So for a buyer at age 65 it will take until age 83 before you get back in payments every penny you put toward premium.  This means the average person needs to beat life expectancy by a significant margin in order to make the income annuity a good investment.

Flexibility:

Since the cost is high it takes a larger portion of the average portfolio to purchase the guaranteed income a person needs.  The cost of this comes when you have less to invest elsewhere for future planning.  Many guaranteed income plans leave you without options for optimal growth, inflation planning, discretionary spending or a legacy.  This is so much more important than most people realize and that’s why my solution to this problem is called the AST Flex Strategy.

Contrary Advice:

There are a lot of opinions out there and if I may be completely honest, there are lots of people with opinions who have no idea what they are talking about.  During one meeting last week a lady said another advisor told her that most people don’t sell immediate annuities because they don’t pay enough commission.  That’s about as ridiculous as Ken Fisher saying he doesn’t make as much money as an insurance salesman but he’s willing to pay surrender fees if clients will cancel annuities and put those funds under his management.  I don’t know how the actual numbers look but Fisher did not become a billionaire by losing money and he doesn’t run a charity.  Choose your strategy on facts and analysis, not a random opinion.

So at the right age, when interest rates give you a good deal you’ll be able to use an income annuity without using the majority of your assets to do it.  Until then use a short-term strategy that allows you to keep control of your assets.  It won’t matter what anyone else says because you’ll have fundamental analysis that proves you’re doing the right thing.

I like guaranteed lifetime income but I don’t agree with the standard message from the insurance industry and I find fault with most of the plans put forth by other advisors.  Guaranteed income products have their place but I see the appropriate situation only about five times per year.  As time goes by and markets change my recommendation may change as well.  But for now I’m more interested in making sure people get the best deal and I’m going to put in a little extra work before I recommend a major financial commitment to anyone.

Talk to you next week!

Bryan

800.438.5121

Make an appointment now…

It happens more often than you’d realize and I saw it again last week.  I was meeting with Joe, who liked the idea of protecting some assets but had one major hesitation.  The only person Joe had spoken with was recommending he put all his investment assets in a fixed index annuity from Nationwide.

This is something I have seen several times before but it still surprises me to see a salesman stick his neck out so far with a wild recommendation.  After the meeting I went back through some notes and found five other people from the last month who dealt with a similar situation.  Another salesman had told each of these people to put all of their assets in an annuity.

I’ve spent some time in the past couple months talking about bad product recommendations but I think a bigger problem is what I would call bad allocation recommendations.

You should almost never put all your money into an annuity.  It’s only appropriate in a worst-case scenario, when retirement savings are just enough to meet income needs.

Let me tell you a little more about Joe.  He owns a successful business and has more than adequate savings in addition to some real estate investments.  Joe is not quite 60 years old and doesn’t have a planned retirement date.  He plans to work another six or seven years and has a local advisor that manages his portfolio.  The local advisor is friend who has done a really nice job choosing investments and performance figures indicate Joe has done well.

Joe is like almost everyone else.  Even if returns have been good he doesn’t want as much risk with his assets going forward.  The recommended annuity would eliminate risk but it made him nervous to put all of his assets into one product that would lock up his money for 12 years.  He had a good relationship with the local advisor and I think a lot of his hesitation came from the fact that Joe didn’t want to turn his back on a guy who had served him well for several years.  I don’t blame him.

I told Joe what I tell everyone.  Annuities are meant as an alternative to safe assets.  Approaching retirement, close to half a portfolio should be allocated to safe assets.  That cuts volatility and risk in half but also limits yield.  Traditionally bonds have been used for the safe side of a portfolio but with recent rate increases bonds have taken a hit as well.

Annuities give you greater safety free from interest rate risk.  Risk in a portfolio can also be cut in half but with the greater earning potential of the annuity there are less limitations on upside growth.

I am certainly not suggesting that half of your assets should go into an annuity.  It works for some but not others.  My recommendations are unique for each person and depend entirely on individual parameters.  Plenty of people will never believe an annuity can improve their situation and nothing I say will get them to see things differently.

Annuities are sold, never bought.  It’s an old saying that kind of makes sense to me.  With so many salespeople proposing an all-or-nothing approach to using annuities I can see why the sentiment toward annuities is often negative.  The bad actors in any profession get all the news.  Just don’t use that as a reason to not explore an annuity strategy.  You may learn something you didn’t know before and find a reason to buy an annuity that makes sense.  You wouldn’t be the first.

If you have any questions or would like me to review a proposal that seems too aggressive please don’t hesitate to give me a call.

All my best,

Bryan

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As much as I say that every situation is unique, the truth is most people fit in one of several categories of retirement preparedness.  If you’ve ever spoken with me than you might remember me telling you a story of someone in a very similar situation.  It is helpful to see that others have been in your position and have retired with a strategy that works.

Categories are general and specific.  How and why to use annuities are specific categories that separate the majority of people into unique situations.  Everyone also fits into a more general category that indicates whether they need an annuity or not.

Because most people are nervous around salesman I feel the need to make sure everyone understands that my goal is not always to sell annuities.  My goal is to help you find answers, regardless of what that means for me.

So I’d like to explain the factors that surround the people who don’t need annuities.  It may help you decide whether you need to be searching at all.

Last week I had the pleasure of speaking with a man named John, who had done well preparing for retirement.  When I say he has a bunch of money it’s not so much that he is wealthy but it speaks more to the fact that his spending needs were but a small fraction of his total assets.  That’s a far better measure of wealth than just adding another zero to the portfolio value.

John found my website because a local broker had pitched him an income annuity as a no-lose, obvious choice for a portion of his assets.  He asked me to weigh-in on the matter and what I discovered is not much different than what I see with many proposals.

Annuities are meant to solve problems and John was pitched an annuity that would solve a problem he didn’t have.  Therefore, I determined the recommendation to be irrelevant.

John is well-positioned and has his objectives clearly defined in relation to strategy.  He made a calculated decision to exit the market and maintain a majority cash position until an excellent investment opportunity presents itself.

If he were to use an annuity it would be for reasons unrelated to the standard industry approach, which is guaranteed income to reduce market exposure.  Instead you should consider a simpler approach.  Safety and yield can provide enhancement or diversification for a conservative plan but there needs to be a deeper justification for buying an annuity.

Most of my clients are not too dissimilar from John.  Many of them don’t need annuities either but using them is a strategic choice to add stability without sacrificing yield or flexibility.

Portfolio growth is more stable and sustainable when market-based investments are balanced with an annuity in place of other safe asset options.  Income needs can be met in all market scenarios so fluctuations in the stock market don’t negatively affect lifestyle or endanger longevity.

I get the feeling that some people think an annuity is going to stick to them if they call to ask questions.  I don’t like the average sales pitch either but in many cases an annuity is the preferred approach.  Within all the proposals and available options you might see there is a right way to approach allocation in retirement.  If an annuity is not the tool for the job then I’ll be the first to tell you so.

Talk to you next week…

Bryan

800.438.5121

Make an appointment now…