Reliability planning in an unreliable world

By Shawn Moran

Tarkenton Financial


Editor's note: A sentence on the second page of this article has been changed to read, "They looked at more than 1,000 different asset allocations, analyzing each with over 200 Monte Carlo simulations, and found that a portfolio with a significant fixed annuity allocation had the highest likelihood of success for that 65-year-old couple."

In the work we do providing retirement solutions to our clients, it's important to remember the world that they inhabit. They may not hear what we have to say if we're not able to help them get past all of the hype and hyperbole that they read in the financial press and see on financial television shows every day.

I subscribe to Forbes magazine, and recently week, they really irritated me. I received their latest issue in the mail and the cover said it all: “Money Magic: Top Secrets from Wealth Wizards.” Forbes and much of the financial press spill a lot of ink writing about “magical” ways to build wealth quickly. Often, they do little more than tempt people away from the tried and the true and into the novel and the new.

We need to remember that boring doesn’t sell newspapers or boost television ratings, and (for good or for bad) the solutions that those of us who believe in fixed and fixed index annuities offer are … well, a little bit boring. Let’s face it, headlines like “13 Ways to Get Rich in 2013” are a lot more attention-getting than “Secure a Reliable Income with an Annuity.”

The latest investment fad du jour (e.g., dot.com stock in the 1990s, real estate in the 2000s, gold in recent years, etc.) with promises of quick wealth often appeals to our clients’ sense of greed. The solutions we offer speak to their true sense of need — the need for income that will live as long as they do.

Unfortunately, our potential clients see those sensational headlines every day. As practitioners, we need to be able to speak to that, helping them to get past the daydreams of riches to focus on the real world of ever-increasing longevity, which requires ever-lengthening streams of retirement income.

Here are examples of some statements that you might find helpful:
  • When you were younger, ROI stood for “return on investment.” Now that you are older and approaching retirement, those same three letters should now stand for “reliability of income.” That is what I do.

  • At this stage of your life, you have far more to lose from a bear market than you have to gain from a bull market. In the work I do, we are not seeking potential as much as we are predictability.

  • Because you are a responsible person, when you were younger, you purchased life insurance in case you did not live long enough and your family ran out of money. Now that you are older, annuities are a tool that can be used to address the risks of living too long and running out of money.
It helps that the academic research is on our side. With the statistical risk of today’s retiree running out of money never having been higher, annuities are increasingly being seen by academicians as vital to a well-designed retirement plan. One very important study that you need to be acquainted with came from the American College in 2012 by way of a white paper entitled “An Efficient Frontier For Retirement Income.”

In this study, the American College looked at the statistical likelihood of a 65-year-old retired couple running out of money if they were withdrawing 4 percent per year in inflation-adjusted income. They looked at more than 1,000 different asset allocations, analyzing each with over 200 Monte Carlo simulations, and found that a portfolio with a significant fixed annuity allocation had the highest likelihood of success for that 65-year-old couple.

Another white paper, from the White House Council of Economic Advisors, also advocates for the aggressive use of annuities in the planning process, but refers to what economists call “the annuity puzzle,” the gap between the large need for people to buy annuities and the small number that actually do.

Through effective communication and armed with the latest research, we can help solve that annuity “puzzle” and help our clients enjoy the security of a retirement income that will live as long as they do.

As you think about your upcoming prospect meetings, I encourage you to find a way to incorporate components of the sample statements I offered and academic research as support to your proposed retirement income strategies. If you have other studies from academic research that you'd like to share with your fellow practitioners, please do so in the comment section below this article.