Help clients solve the income planning dilemma
By Justin Long
Recently, I sat down with Mike Walters to discuss how to set up a proper income plan. We shed light on the varying views advisors have and also share some of the solutions I have found top producers are using today.
Mike Walters: Justin, income planning is probably one of the hottest topics in the industry right now. Everybody’s trying to gain more knowledge in it. Products are being designed and tweaked specifically because of it. And while it’s one of the hottest topics, it’s probably one of the most polarizing topics, where people have extreme differences in their views in terms of how to set up a proper plan for income.
Could you share a little bit about maybe what those extremes are? Kind of the opposite ends of the coin, if you will? And then what some of the solutions really are?
Justin Long: I talk to advisors all over the country, and even advisor to advisor they might have the same philosophy, but they do tweaks here and there. But there are definitely articles that catch my attention because they do lean completely one way or completely the other.
Here’s two examples. One was an article talking about retirement income and building your knowledge in retirement income. So I thought, “Oh, this is a good article. Let’s take a look and see what it says.” The article begins to go down the trail of, “Hey, you know, 98 percent of advisors are trying to build their knowledge,” which is great. But then it starts busting down and saying that the investment industry doesn’t provide tools for income planning, they don’t know really how to approach it. And then this one really gets into almost a product pitch, saying they recommend mutual funds over annuities because they don’t like the loss of liquidity and when you’re taking guarantees, you lose your flexibility. And it goes through that whole conversation. So definitely leaning towards the idea of staying away from the fixed income or the fixed guaranteed income products.
MW: So in that article, their theory is that flexibility trumps the safeties and the guarantees. So, even if the market was going down and you’re drawing out of an account that’s posting negatives, they still believe that the flexibility is what’s most important.
JL: That was their highlighted point. The other one goes exactly the opposite and says that annuities and other income solutions are what clients are looking for. And their other income solutions ultimately are really other annuities. And they’re saying their number one goal is protecting the clients; protecting them from outliving their assets. And obviously we’ve heard that over time with, “Hey, if you’re guaranteeing income for life, clients are not outliving their assets,” and saying that one out of every three clients that are walking into the advisors that they studied are asking immediately for annuities before they even find out what they need.
MW: So they just want a guaranteed income stream?
JL: Exactly. So the two articles are on completely opposite sides of the table. I don’t think mutual funds are bad. I don’t think annuities are bad. I think it’s all a matter of what fits with what you’re trying to do.
MW: Different tools for different jobs?
JL: Exactly. You buy a Porsche to go on the Autobahn, you don’t buy a Porsche to pull a boat. That’s kind of what we’re looking at here. What are we trying to do?
It's important to look at taking care of clients' immediate needs with annuities; taking care of that immediate need that they cannot outlive. They need to know that’s there.
And then advisors must look at clients' flexible assets on the back end. So it’s about fitting the prescription for the right need. One may fit better than the other, but it's important to take care of that immediate need up front and then have the flexibility on the back end with their other assets that are available.
MW: We believe that there’s a cycling that’s taking place where we’re guaranteeing the income for periods of time and always staging the next period of time.
JL: Correct. It’s setting up to fill in the next bucket, we’ll say. People hear the bucket strategies, whether it’s bonds, CDs, annuities, whatever. It’s similar to that, where you’re filling in that guaranteed income, but then also having that conversation on the back end about their other assets that can go to the security route because it’s not an immediate need, it’s something longer term.