I Can’t Believe a CFP Designed This Plan

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 2016 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…



Make an appointment now…

Last Updated on February 1, 2023 by Bryan Anderson