How to attract retirees and sell annuities in today's marketArticle added by Lew Nason on July 9, 2009
Lew Nason

Lew Nason

Dallas, GA

Joined: October 13, 2006

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For the past six months, my phones have been ringing off the hook with calls from insurance agents, financial advisors and financial planners who are looking for the most cost-effective ways to be in front of new prospects -- or to completely change the products and services they're offering and enter into an entirely new market. As one advisor told me, "I do not want to contact any of my existing clients because they are all angry with me because of the money they have lost in the stock market. I need to attract all new prospects." I've gotten heard comments from many of the agents, advisors and planners with whom I've spoken.

As we've told these advisors, you don't have to abandon your existing clients -- and you shouldn't abandon them. They need your help now more than ever. Yes, they may be unhappy with you, and they may be looking to move their money to someone else; however, you can be their knight in shining armor by rescuing them from the evil stock market dragon. So, while the bear market has robbed them of net worth, it makes them a lot more motivated to fix their problems.

And remember, your competitor's clients are considering doing the same thing. That means for every client you now have, there are literally hundreds, maybe even thousands of new prospects in your community that are waiting to take their place. These are motivated prospects that you can gain as new clients. This bear market is an exceptional opportunity for you to open more new accounts than ever -- if you know how.

So, what can you offer your existing clients and new prospects? How about bonds, indexed annuities or fixed annuities? When stocks are falling, isn't there usually a flight to safety? How about you start a marketing campaign that centers on things like safety, saving taxes, locking-in past returns, recouping losses and providing a guaranteed income they can't outlive?

Get back to basics and become a better money manager

Unfortunately, many agents, advisors and planners allowed themselves to get caught up in the momentum of the stock market in the 90s. Hopefully, they now fully understand the ramifications of that mentality. The declines in the past year -- and the actually miniscule stock market "12 year total returns" from June 1997 to June 19, 2009 -- are providing planners with an opportunity to reexamine their overall investment strategies and philosophies in an effort to determine if they are appropriate for most retirees.

Let's start by understanding what's happened in the past 12 years in the stock market and do some comparisons.

Consider this:
  • The actual 12 year total return for the S&P 500 Index from June 30, 1997 to June 19, 2009 is only 4.07 percent, or 0.33 percent per year for the past 12 years. (885.14-921.23)

  • The actual 12 year total return for the Dow Industrial Average from June 30, 1997 to June 2009 is only 16.48 percent, or 1.28 percent per year for the past 12 years. (7,331.04-8539.73)

  • The actual 12 year total return for the NASDAQ from June 30, 1997 to June 19, 2009 is only 26.73 percent, or 1.99 percent per year for the entire past 12 years. (1,442.07-1827.47)

  • If your clients had been in a traditional fixed annuity averaging just 4 percent annually, they would have had a 12 year total return of about 60.1 percent. And, their money would have grown tax deferred, with no annual management fees.
*Note: The average annual return for the S&P 500 Index for the past 20 years from June 30, 1989 to June 19, 2009 is only 5.46 percent (less income taxes and management fees.) Management fees of 2.0 percent alone would bring the average annual return down to 3.46 percent.

It's time to get back to basics and educate yourself, your clients and your prospects on the fundamentally sound investment strategies, like dollar cost averaging, diversification, asset allocation, fixed investments, annuities, laddering and safe withdrawal rates during retirement. Plus, factoring in the cost of income taxes and annual management fees. There is much more to investing than just reaping the highest returns.

Many people, including most money managers, assumed that managing money for income is simply a matter of selling investments as needed from a diversified portfolio, but there are hidden dangers in this strategy that are not obvious. An investor, who is forced to sell investments for income during a down market, can quickly devastate a retirement portfolio to the point where it is no longer possible to recover, even when the market does. Recent stock market losses have clarified the risks, and many financial advisors are now recommending lower and lower withdrawal rates.

What's the "safe" withdrawal rate in retirement?

One of the most frequent questions retirees ask is, "How much can I safely withdraw per year from my retirement account?" If they retire at age 65 they could easily need their retirement income for 25 or 30 years. Miscalculating the withdrawal rate could result in an involuntary return to the workforce, or being forced to move in with their children.

Unfortunately, there isn't a great deal of research in this area (most analysts devote their time to the question of accumulating capital, not spending it), so there have been only a few studies on "safe" withdrawal rates.

Most of the studies use data from Chicago consulting firm Ibottson Associates showing returns from stocks, bonds, and cash since 1926 as the basis for their analysis. Even though the average annual rate of return throughout the past 80 years for the S&P 500 is about 9 percent, you can't reliably withdraw an amount that large because of inflation and the ups and downs of the stock market. Reputable studies on "safe" withdrawal rates attempt to answer the question for you and your clients.

The Bengen study. In the February 25, 1997 issue, Wall Street Journal columnist Jonathan Clements reported on a study by San Diego based financial planner William Bengen. Bengen looked at year-by-year returns since 1925 for a 50/50 stock/bond portfolio. He assumed half the portfolio was in the S&P 500 and half in intermediate term government bonds. Using a 30 year holding period, he calculated that a 4.1 percent withdrawal rate would allow retirees to survive the worst market declines.

The Harvard study. In 1973, Harvard University did a study to determine how much they could safely withdraw from their endowment fund without eroding the principal. Assuming a portfolio of 50 percent stocks and 50 percent bonds and cash, Harvard's analysts calculated they could withdraw 4 percent the first year and then adjust the subsequent year's withdrawals for inflation. For example, if there was 10 percent inflation, the second year's withdrawal would be 4.4 percent of the initial portfolio value.

The Trinity study. Dallas Morning News columnist Scott Burns has written extensively on a "safe" withdrawal study by three Trinity University (San Antonio, TX) researchers. The Trinity Study measures the "success rate" of various portfolios from 1926 to 1995. The "success rate" is the percent of time a retiree could sustain a given withdrawal rate without depleting his retirement assets. One portion of the Trinity study adjusted withdrawals for inflation/deflation, much like the Harvard study. This analysis showed that of the portfolios considered, the optimal asset mix is 75 percent stock/25 percent long term corporate bonds. For a 30 year payout period, and a 4 percent withdrawal rate, this mix had a 98 percent success rate. At a 3 percent withdrawal rate, the 75/25 mix had a 100 percent success rate. Interpolating these results would give you a "safe" withdrawal rate of slightly less than 4 percent, virtually identical to the Harvard study.

The consensus seems to be about 4 percent per year, but how should people interpret those studies? The first thing to consider is that these studies are based on investment returns before expenses. If you're paying an investment advisor an annual fee of 2 percent of assets and he has you invested in no-load mutual funds with a 0.5 percent expense ratio, your annual expenses are 2.5 percent. Your "safe" withdrawal rate is 4.0 percent - 2.5 percent = 1.5 percent

Another consideration is that most of these studies are based on historical data. The fine print here should read, "Past performance does not guarantee future results." While there is every reason to believe that investment returns in the next 80 years will be similar to the previous 80 years, there's little chance it will be exactly the same. To say that 4.0 percent is a "safe" withdrawal rate and that 4.1 percent will leave you broke implies a measure of accuracy in the forecast that just isn't there. It may make more sense to say that the "safe" withdrawal rate going forward lies somewhere in the range of 3.25 percent to 4.25 percent.

Considering the above studies, annual management fees, income taxes and the historical annual returns of annuities, what is the justification for putting a retiree's income producing assets at risk in the stock market? Isn't it time for you to start a marketing campaign for retirees that centers on things like safety, saving taxes, locking in past returns and providing a guaranteed income they can't outlive?

*For further information, or to contact this author, please leave a comment and your e-mail address in the forum below.
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