If you've read any of my previous posts, it's no big surprise to you that I'm very passionate about the subject of retirement income. Honestly, I think this is one of the biggest boondoggles for financial advisors, investment companies and life insurance companies.
None of them have been prepared for the growing demand that is now upon us to help our clients distribute their accumulated wealth in the best way during their retirement.
For years, nobody talked about it…at all. The industry was laser focused on gathering assets and helping folks accumulate wealth.
When you look at the issue of income distribution, there are actually a couple of broad issues at play here:
Just recently, LifeHealthPro published an article that highlighted a recent study completed by Conning Research & Consulting. The study is titled, “The Big Payout: Individual Retirement Income Opportunities”.
The data that has been released from the study is fascinating, and I’ll admit that I was a bit surprised by some of the numbers.
Their study concludes that almost half (46% to be exact) of all defined contribution assets (think 401k, 403b etc.) are currently held inside of individual annuity and group annuity contracts. With the dominance and pervasiveness of the mutual fund industry in the last couple of decades, I didn’t expect that high of a percentage of defined contribution assets to be held in annuities.
Now, while all that information is fascinating, it’s just the beginning of the story in my opinion.
Well, for starters it means that life insurance companies, agents and brokers have a tremendous opportunity in front of them. We have a chance to help our clients turn those buckets ‘o money into the income they’ll need when they punch the clock for the last time before strolling off into the sunset.
Certainly I’m biased here but…
The insurance industry clearly has the advantage in this war for managing retirement income streams of our baby boomer clients. We have the products that will guarantee lifetime income and control market volatility. These are two distinct problems that retirees face. Life insurers and their products win both battles—handsdown.
Make no mistake though…
The mutual fund industry, investment managers and big wirehouses are all gunning for the chance to win this fight. They won’t stand idly by and back down from the fight. We’re talking about trillions of dollars at stake here.
I pretty much threw myself a softball on that one.
Two big reasons life insurance companies can win this fight, if we spend the time to educate people properly:
I’m going to give you a couple of visual aids to help illustrate my point here. First, take a look at this chart that displays the sequence of returns year by year of the S&P 500 from 1989-2008.
Notice that the average annual rate of return doesn’t change.
If you were purely in the accumulation stage of your life, no big deal what order the returns come, you’re not drawing any money out of market.
But consider the reverse scenario. If you’d retired in 2008, you would have been down -37% and you would have had an additional three years of losses within your first ten years of retirement.
See what happens to your income generating assets when this happens. Consider this chart that shows a hypothetical $1,000,000 investment with $50,000 annual withdrawals, This is in line with a 5% withdrawal rate that many financial experts deem appropriate.
In both scenarios, the withdrawal was $50,000 per year and increased 3% each year to keep pace with inflation. As you can see, sequence is everything. So, now I’ve gotta ask.
Do you know what the sequence of returns will be in the future?
Yeah I can’t either. If I could do things like that I’d charging big money for my predictions!
The battle for who wins the retirement income hearts of America is far from over. However, as far as I’m concerned there’s no contest. Using fixed insurance vehicles can insure that scenarios like the one displayed in the charts above never happen to our clients or our loved ones.
Any decent fixed index annuity with a good GLWB (guaranteed lifetime withdrawal benefit) can provide similar if not superior income and with a guarantee that your client will never outlive it, in spite of market volatility or the artificially low interest rate environment like we have today.
If you’d like to learn more about how we can help you fight this battle, get in touch with us. We’ve got the tools , expertise and resources to help you plan for your future retirement income strategy.
Brantley is a practicing life insurance agent and has been for over 18 years. After years of trying to sell like his sales managers wanted him to, he discovered that people want to buy life insurance if you actually explain the benefits.