Impact of product allocationBlog added by Mike McGlothlin CFP®, CLU, ChFC, LUTCF on April 11, 2014
Mike McGlothlin

Mike McGlothlin CFP®, CLU, ChFC, LUTCF

Fort Wayne, IN

Joined: March 06, 2014

The financial services industry always discusses the impact of asset allocation, but it rarely mentions product allocation. How we use products can greatly enhance a client's solutions and can also reduce risk—much like asset allocation. Using annuities in a portfolio can help reduce the pressure of withdrawals from a securities-based account.

Let's look at a typical retiree scenario in the U.S.:

Tony and Katherine have $750,000 in a managed account. Between the two of them, the couple anticipates $20,000 in Social Security income payments. The remaining $30,000 will be taken as systematic withdrawals from the managed account. The withdrawal represents a 4 percent distribution from the account. Over the years, the 4 percent distribution is likely to put a lot of pressure on the account if there is a repeat of 2008 or longer-than-expected life expectancies.

By adding additional products to the portfolio, the client can reduce the pressure on the managed account withdrawals. If Tony and Katherine purchase a $150,000 joint life immediate annuity with cash refund, the annuity would generate nearly $9,000 in annual income. Using another $100,000 to buy an annuity with an income rider, the couple would receive another $5,000 per year. The remaining $16,000 continues to be withdrawn from the managed account—now only a 3.2 percent distribution factor. The reduced distribution factor helps the couple in extended down markets, allows the managed account to grow more, and the couple still retains control of their assets and protects the beneficiaries.

Allocating a client's portfolio across different products, not just asset classes, can add significant value to the portfolio, while providing guaranteed income for life—which addresses one of our clients' biggest fears. Look at alternatives before settling for the typical 4 percent distribution from managed accounts.
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