How financial professionals can help clients outlive their income
By Jason Lampa MBA
College Savings Bank
Thanks to poorly managed pension plans and employers handing over responsibility to employees to manage their retirement income, many people are reaching retirement age unable to retire.
Dreams of traveling the world and starting second careers have been replaced by the reality of postponing retirement for another 10 years. What can advisers do to get their clients back on track and rekindle those dreams of world travel?
Aggressive income strategies utilizing alternative investments
The days of conservative investing in which assets are allocated to money market accounts, CDs and short-term bonds need to become memories of the past. Opportunistic advisers may want to consider shifting assets to alternative investments which can possibly make up the deficit in retirement accounts. The five strategies which I would like to present to you include:
1. Hard money lending — commercial real estate
2. Bank lending instruments
3. Securities-based Lending
4. Structured settlements
5. Transportation financing — gold
In our opinion, the income generated per year utilizing alternative income strategies, may outweigh the risk to a portfolio associated with this strategic income modelAnything less than a combined 8 percent return utilizing the aformentioned income strategies should not be included in the income portfolio.
It is important that I remind you the following strategies should only be implemented for those investors with assets greater than $5 million. For this example, let us start with a portfolio of $1.5 million.
Accumulated account value: $1.5 million
Current allocation: 20 percent equities, 70 percent debt and 10 percent cash
Goal: Provide client with an income stream of greater than $120,000 annually.
Time period: 25 years
Step 1: Utilizing a securities-based loan — securities-based loans use stocks, bonds, mutual funds and other traded securities to create a credit line
Step 2: Through the aformentioned mixuture (20,70,10) the investor may be provided up to 85 percent loan-to-value
Active account: $1,500,000
Loan to value: 85 percent
Credit line available: $1.275 million
Step 3: First three months
- $1.275 million is placed in transportation finance vehicle — dry season
- Four trades per month
- Each trade nets 1.5 percent based on negotiated contracts
$1.2575 x 1.18 percemt = $1.5 million
Step 4: Next nine months
Place $750,000 in hard money loan programs. Lending rates paid to investors is 15 percent for 12 months — next nine month provides a total of $834,375.
Place $750,000 in structured settlements (20 years, 240 months, monthly payments $6250 per month). This structured settlement is guaranteed by an A rated insurance company. Total aggregate value is $1.5 million.
Step 5: Next three months
Place transportation finance (guarantee of principle) accumulated value $1.5 million in cash.
Place hard money loan procedes $834,375 accumulated value in cash.
Total accumulated value placed in cash until beginning of the year: $2,334,375
Based on the following hypothetical model, the $2.33 million will cover the costs of a bank instrument issued with a face value of $10,000,000. Our lending facility provides a LTV of 90 percent, providing the retirement client $9,000,000 in exchange for the $2.33 million of cost. The net result is $6.67 million loan for five years ( 4.67 percent borrowing cost per year).
12 months following the start of this strategic income model, the retirement client is sitting with $6.67 million.
Step 6: Place the $6.67 million into U.S. treasuries within a securities-based loan structure. Placing this money in U.S. treasuries allows the retirement client a LTV of 95 percent. The $6.67 million placed in treasuries will pay for the $6.34 million line of credit (1.5 percent to 2.0 percent annual charge).
Step 7: Pay off the original $1.27 million for the inital line of credit
Step 8: The retirement client now has $5,000,000 that should be placed in a guaranteed structured settlement paying a minimum of 2.4 percent for a five-year term
Step 9: At the end of five years, bank instrument is paid off
Step 10: Repeat five times
By utilizing the tools available in the market, providing income for clients facing a long retirement is a simple process. Though this process may seem confusing at first, by joining with the right strategic partners, this income model can be repeated while mitigating the risk far superior to traditional diversification.