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CONSUELO MACK: This week on WealthTrack: how to make sure your portfolio stays alive as
long as you do. Kiplinger’s insurance expert Kim Lankford and New York Life’s retirement
income security chief Chris Blunt share strategies to insure you don’t run out of money in
retirement. Next on Consuelo Mack WealthTrack.
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SPONSOR: The company keep is also the company we keep.
Together we'll provide lifetime guarantee income and investments solutions.
SPONSOR: Additional funding provided by: Loomis-Sayles - investors seeking the exceptional
opportunities globally. Research Affiliates - Efficient index foreign inefficient market.
The Wintergreen Fund - your home for global value.
Rosalind P. Walter
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Hello and welcome to this edition of WealthTrack. I’m Consuelo Mack. They say nothing is certain
but death and taxes; what they don’t say is that for retirees, the greatest uncertainty
is the date of death, and the greatest fear is running out of money before that final
earthly departure. And therein lies the biggest challenge for retirees. In insurance industry
parlance, it’s known as longevity risk. As this chart shows, a healthy 65 year old
man has a 75% probability of living to 78, a woman to 81; a healthy 65 year old man has
a 50% chance of making it to 85, the woman to 88, and the odds decrease to 25% for making
it to 92 for a man and 94 for a woman. But guess what, no one knows who is going to be
in that lucky 25%, living well into their nineties and beyond.
Until now the solution to longevity risk was to limit withdrawals from retirement plans
to around 4% annually, the magic number that was supposed to protect a principal drawdown
to zero before a client’s time. It turns out that formula has some flaws. Many retirees
find they can’t live on 4% withdrawal rates. That’s $40,000 on a million dollar portfolio,
before taxes- being a millionaire never felt so poor. Many financial plans didn’t take
into account a market decline of 50% in a given year, or the meager level of income
options, from record low interest rates to historically low dividend yields, to a decade
of negative returns in a major market index like the S&P 500.
Then there are the new realities of retirement. Employees, not employers, are now responsible
for increasing amounts of their retirement funds, with the possibility of less support
from traditional sources of guaranteed income such as pensions, Medicare and Social Security.
It’s a scary responsibility. Only 39% of employees are confident in their ability to
make the right financial decisions. And according to Fidelity Investments, 75% of pre-retirees
do not have a formal retirement plan in place. To fill in the gaps, firms such as Fidelity
are increasingly looking beyond the traditional IRA and 401k mix of stocks, bonds, and cash
to guaranteed income products from life insurance companies.
The reason? As this chart illustrates, over the years income annuities can deliver higher
payouts than other investments because in addition to distributing interest and premium,
insurance companies pay mortality credits, subsidizing those who live longer with the
capital of those who die early.
How can you manage the great unknown called longevity risk? We asked two retirement planning
pros to join us. Kim Lankford is a contributing editor and columnist for Kiplinger’s Personal
Finance magazine and author of several books, including The Insurance Maze: How You Can
Save Money On Insurance And Still Get The Coverage You Need. Christopher Blunt is executive
vice president of Retirement Income Security at New York Life where he oversees income
annuities, investment annuities and mutual funds. New York Life is a WealthTrack sponsor,
but Chris is here on his own merit, as an acknowledged pro in the retirement field.
I began by asking them for advice on handling the risk of running out of money.
KIM LANKFORD: Well, I think a key thing is to look at your cash flow through retirement,
and look at what your expenses are, and look at what sources of guaranteed income, if any,
you have coming in. And then you really need to focus on the difference between those two,
and how you’re going to fill in those gaps, and knowing that those gaps can keep going
on well beyond average life expectancy. I mean, average life expectancy is mid-80s for
men and women. And, you could live 10, 15 years longer than that.
CONSUELO MACK: So, Chris, both of you advise individuals through various means. So, from
an individual’s point of view, emotionally, what do we need to know about the fact that
we might live longer than we think? How do we factor that into our planning?
CHRIS BLUNT: It’s difficult, and I think this is one of the great risks that retirees
face today. There’s a myriad of risk, but this is a big one. And the reality is, the
life spans have increased so much faster than folks I think had ever anticipated. And when
social security was created, the average life expectancy was about 67. So, paying you a
pension at 65 wasn’t a big risk for the federal government to do that. You know, today
it’s now 85, 88, depending on your gender. And so, this is a huge issue, and it really
messes with the math, frankly, of someone trying to figure out, how much is enough?
You know, whatever that number was in the past, if it’s now got to carry you 20, 25
years into retirement, it needs to be a big number.
CONSUELO MACK: Why is it so essential to supplement social security? I mean, what’s wrong with
the old mix of stocks, bonds and cash, and that’s going to get me through? Kim?
KIM LANKFORD: Because those expenses are going to continue for the rest of your life. And
if social security is only filling a very small piece of that gap between your expenses
and what you have, then you really need to think of filling that in yourself. And you
really need to not just look at a portfolio that, you know, maybe I can be conservative
and think, oh, maybe I’ll live to the late 80s. You don’t know how long you’re going
to live, and you don’t want to find that out in your late 80s, that you don’t have
enough money. So that’s where it’s good to look for another source of guaranteed income.
CONSUELO MACK: So, Chris, from an insurance person’s point of view, this is music to
your ears--
CHRIS BLUNT: Absolutely.
CONSUELO MACK: -- to hear this, because this is your business. But again, to answer that
question of, why doesn’t my traditional stock, bond and cash mix work anymore, what
is it that an insurance product, for instance, can bring to the table that you cannot get
from a traditional investment advisor, for instance?
CHRIS BLUNT: Sure. And I think there’s a couple of things. One is mathematical, and
the other’s really emotional. I think to the mathematical, what you can’t tell me
today is the day you’re going to die. And so, it’s hard for me to optimize a portfolio,
to Kim’s point. If you told me “I’m going to live until I’m 81,” I could build
you a fabulous portfolio that will spend down until your 81st birthday. But I probably have
to build it assuming you could be 95 today. And that factors in a lot of inefficiencies.
So I think where risk pooling and insurance products come in, you can actually put products
like an immediate annuity in your portfolio that can pay out through life expectancy.
And the reality is, the risk of you living beyond that is borne by the insurance company.
I think the emotional factor is more sort of what Kim was alluding to, which is, you
know, if you know you have expenses that are going to last forever- food, rent, heat, medical
insurance premiums, that’s a big one today- you really need to match it up with a guaranteed
lifetime income stream. That’s one thing, if my portfolio doesn’t fare well, and maybe
I can’t buy as many, you know, toys for the grandkids. It’s another one if I’m
getting, you know, evicted from my house or my apartment.
CONSUELO MACK: So, Chris, if I look at my traditional portfolio, where does the annuity
fit in? Am I taking money out of cash, stocks, bonds? How should I think of an annuity?
CHRIS BLUNT: A great question. And, you know, one, we have to be careful of different types
of annuities. So what I’m going to talk about now would be the traditional income
annuity, guaranteed lifetime income annuity. And there, it’s really a fixed income substitute.
So it’s typically coming out of your bond portion of your portfolio, and it’s interesting.
You know, if you look at the research, this is one of those rare free lunches in our business.
Meaning, if you take some of that bond allocation and use an income annuity instead, which has
a lot of fixed income characteristics, but also brings us longevity protection, you get
this odd result of, you’re not only reducing risk, meaning your odds of running out of
money go down. The really ironic piece of this is your terminal value, meaning the likely
amount of money you still have left, at life expectancy, is actually higher. And it’s
incredibly counterintuitive to people, but the reason is, the income efficiency and the
power of this risk pooling. The reality is, you know, you are being subsidized as you
live longer. Your income is being enhanced by all of the people who died prior to life
expectancy. You know, it’s really the whole value proposition of insurance companies,
is the value of risk pooling.
CONSUELO MACK: So, what you call the mortality credit then kicks in as you get older. As
you outlive the rest of the pool, in other words, you’re the beneficiary. Is that right?
And that’s where you get that income for the rest of your life.
CHRIS BLUNT: Exactly right. If you think about it, it’s the reverse of life insurance.
Life insurance, you write a bunch of little checks throughout your lifetime, and then
if you pass away prematurely, you get this large check from the insurance company. This
is the opposite. You’re giving a check to the insurance company up front for a series
of checks. But really, what you’re protecting against is living too long, not living too
short.
CONSUELO MACK: You know, so Chris mentioned the fixed immediate annuities. But there’s
another annuity, which has a growth component attached to it, which is a variable annuity.
And I’ve told you this over the phone, Kim, at one point, that there have been some articles
written about variable annuities, that just saying, kind of the worst thing that’s possibly
ever happened to seniors. So there’s a tremendous amount of criticism and concern about variable
annuities. Tell me about, number one, what a variable annuity is, and also, you know,
what’s a good one versus a bad one?
KIM LANKFROD: Well, and that’s the thing. There’s a huge range from good to bad in
variable annuities. Huge range in the guarantees they’re providing, and a huge range in fees.
So you need to be very, very careful, first of all to make sure it fits within your portfolio
the right way, not being oversold, which is the criticism that some have had. But also
to make sure that you’re getting one that has decent fees for a decent guarantee. And
that’s been harder to get, because some of the ratings agencies have been a bit concerned
about some of these guarantees. And so, a lot of the fees for them have gone up a bit.
But just to let you know how it works, so, these are very attractive for people who are
in their late 50s, early 60s, may not be ready to retire quite yet, but they saw what happened
in 2008 and they don’t want that to happen right before they start making their withdrawals.
So they want to do what they can to lock in some kind of guaranteed income now, but still
be able to participate in the market. And so many of these have a guarantee that the
value of this guaranteed pot will increase by maybe six percent per year, and then you’re
able to withdraw a certain amount every year for the rest of your life, no matter how long
you live. And what they’re interested in is, if the value of their investments goes
up, a lot of these bump up in value then. So you still get that market participation,
but you still have a guarantee. But the key thing is, you really do need to be very careful
with fees. You don’t want to put all of your money in this, because the fees are quite
large. So you want to, once again, look at that income, and how much of that income you
need to provide, and count backwards.
CONSUELO MACK: So, Chris, what’s your take, and what’s your assessment of variable annuities
versus a fixed annuity?
CHRIS BLUNT: Well, I think Kim said a lot of very important things, which is, it’s
not the vehicle, typically. A lot of the bad press has been about maybe misuse of the vehicle,
or a lack of understanding. So I think the first thing is, you know, can you understand
it? You know? Because these are complex products. Some of them are infinitely more complex than
others. But I think …
CONSUELO MACK: Well, so, are there understandable variable annuities that don’t come with
a 900-page prospectus?
CHRIS BLUNT: I think we’re starting to see more of that. I think there’s been a move
towards simplification of product. I would also say that this is, you know, a plug for
advice. I mean, the reality is, these are a little more challenging than wading through,
you know, returns on an index mutual fund, for example. And so, I do think it’s important
to have an advisor that you trust, and someone who understands that the right answer for
everybody is probably not a product. It’s probably a slew of products. But it’s really
a process. It’s who’s helping you sort through how these products all work together?
So, I would say variable annuities, there’s a place for them, I particularly think in
this transitionary phase of --you know, while it may not be the uber efficient income vehicle,
nor is it a pure growth vehicle, there is something in that transition phase where it
can play a valuable role. But the key is really, do you understand how it works, and do you
understand it, most importantly, in the context of your overall portfolio?
CONSUELO MACK: So, let’s talk about how to put a portfolio together, and, you know,
where these different vehicles fit in. So, the fixed immediate annuity, Chris, which
New York Life specializes in: so who is that appropriate for? You know, when do you buy
one? And again, what role does it fulfill in your portfolio?
CHRIS BLUNT: Yeah, I think of it, if you had a spectrum of, you know, growth over here
and income over here, it’s once again kind of the ultimate income vehicle. So it’s
really for someone that says, you know, I need income and I need it now. You know, and
I want to maximize my income, because it’s a very efficient income vehicle. You know,
the trade-off for that is, you know, you’re not going to have the liquidity that you’re
going to have, you know, in other products.
So, typical buyer for this we find is someone probably in their mid-60s, sweet spot, in
their 70s. And that’s where, once again, these mortality credits kick in, and the payout
rates get incredibly attractive, where it almost becomes, for the client and the advisor,
why wouldn’t I do some of this? You know, if your alternative is, you can have an eight
percent return for as long as you live, well, you’d need to work pretty hard to come up
with a portfolio where you could say to someone, “You can withdraw eight percent without
an undue risk of outliving your assets.”
CONSUELO MACK: Now, the other interesting thing is, you know, we talked about that there’s
a lot of research, and academics have been saying, that annuities should be used by more
people, for a long time. And no one really listened to them. But tell me about the research
that you need to have, what, 30 or 40% more saved if you don’t have an annuity? How
does that work?
CHRIS BLUNT: Wharton had done some research and I think The Wall Street Journal had picked
up on this. And the whole point- once again, back to this risk-pooling benefit- was, their
conclusion was, for 25 to 40% fewer assets, tying up fewer assets, you can generate the
same level of income, guaranteed for life. And so, I think that’s important, not only
because of the income piece. But basically, that’s where this weird finding of, how
did you end up with more money? Typically, when you reduce your risk, you end up with
less money. Well, it’s because you’re tying up fewer assets to generate that amount
of income. You’ve got more assets available for growth.
KIM LANKFORD: Well, and that’s where it’s important to put it all into context in an
overall portfolio. Because, you know, the downside is, you’re not going to be able
to pass any of that money on to your heirs. I mean, you could have a joint annuity with
your spouse, or someone else. But, that’s going to lower the payout. So, to maximize
the payouts, you’re going to have a single life annuity, and then you need to have other
money that’s going to accomplish those other goals. So, you need to kind of look at it
in different pieces, putting it together as an overall portfolio and not saying, “well,
this is all of my money here, and unfortunately, you know, I’m afraid to do this, because
I won’t have anything to pass on.” Well, if you have a little piece of your money in
this, you know that that’s guaranteed, then some of the rest of your portfolio can be,
you know, for money to your heirs, money for your emergencies or other expenses, things
like that.
Another key thing for people to keep in mind is inflation. The standard fixed annuities
don’t increase the payouts through the years. And, in order to get the highest payouts,
it’s going to remain the same forever, which is both a blessing and a curse. I mean, on
one side, you know exactly what you’re going to be getting, but on the other side, through
the years, that purchasing power is going to go down. So you need to have other money
set aside to help be able to fill in those gaps through the years. Or, you could also
get a fixed immediate annuity that has inflation adjustment, which the academics love those.
But people, when it comes to buying it, they don’t buy them as often, because they generally
start with a 25 to 30% lower payout at the beginning, and it’s the longer you live
beyond life expectancy, the further you come out ahead. So, either way, whether you’re
going to do it through an inflation-adjusted annuity or through that other pot of money,
somehow you really need to think about how you’re going to deal with inflation.
CONSUELO MACK: So, is there any question in your mind, Kim, that basically every retiree,
unless you’re extremely wealthy, should not have some sort of an annuity? And I can’t
ask Chris this question, but--
KIM LANKFORD: Well, I mean, I think that you need to do that calculation yourself, looking
at the expenses and matching that up with your sources of income. Because, if you do
have a valuable pension, and you do have social security coming in, maybe that meets all of
your needs. You need to have some kind of income that’s going to come in to match
up with those expenses. People who don’t have a pension, that’s where it becomes
very valuable; people who have a pension that is not going to cover a lot of their bills.
That’s where it becomes very valuable. So, you need some sort of lifetime income. It
could come from an annuity. It could come from a pension or social security. But you
need to match those two things.
CONSUELO MACK: So, there’s another piece to this as well, and it’s called longevity
insurance. So Chris, tell us what longevity insurance is, and then we’ll figure out
whether or not that’s another thing that we need to add to our planning.
CHRIS BLUNT: Yeah, and I guess just to surprise you, I don’t think this is an end-all, be-all
for anyone. There’s no one--
CONSUELO MACK: Longevity insurance?
CHRIS BLUNT: --perfect product. Or just, even immediate annuities aren’t perfect for everyone.
There are folks who, either because of the level of their assets, frankly don’t have
a need to annuitize, or some it’s, you know, more psychological, frankly. But yeah, I think
longevity insurance has really taken out, you know, one level beyond, I’d maybe call
it the graduate course of guaranteed lifetime income, where instead of the payments starting
today, they would actually start at your life expectancy. So, take a simple example. A 65-year-old
puts money in the contract, with the understanding being that the income will not kick in until,
say, their 85th birthday. Now, the beauty of that is tremendous leverage. So, a lot
of income can be generated with a small amount of premium. But what it really does, for the
financial planner, is once again answer that question we couldn’t answer before, which
is, when are you going to die? And we don’t really know when you’re going to die, but
through risk pooling, we can assume that all I have to do is build a portfolio to take
you through your 85th birthday, because at age 85, the insurance company’s going to
kick in, the longevity insurance is going to kick in.
I think what is challenging about this is, now this is pure insurance. Meaning, the downside
is, you could put $100,000 in this. You know, if you die on your 83rd birthday, well, you
know, frankly it was wasted. But, you know, as was your car insurance when you didn’t
have an accident, and your home insurance. But I think, you know, the academics love
it. I think some advanced financial planners love it, because once again, it gives you
that leverage of taking that longevity risk off the table with one single investment.
CONSUELO MACK: So, at 65. Is that right, Kim? Is that when we really should seriously consider
longevity insurance, something that we, you know, don’t know if we’re going to take
advantage of, or that if we do, it’s not going to happen until we’re 85? I mean,
again, I can see where that’s a hard sell.
KIM LANKFORD: Yes. It is. But when you look at the numbers, I mean, that’s just where,
as Chris mentioned, the academics loved this. Because you look at the numbers, I mean, it
is incredibly efficient. I mean, if you invest about $50,000 at 65, when you’re 85, if
you live that long, it could take just about a year and a half to make up for that money
you originally invested. And everything beyond that is in addition. But the other thing that
it does is, as he mentioned too, is it really helps you understand what to do with the rest
of that money from that 20 years, because you don’t have that big unknown. You’re
not having to build in that big cushion of, well, what happens? What can I do with that
money, just in case I live too long?
And two other things about this that are really good timing is, at 85, that’s when a lot
of people end up needing long-term care. And, they have some of these big expenses that
crop up in their 80s or so. It’s great to have some extra money coming in, just a big,
big hunk of extra money coming in at that point. Also, at 85, it’s nice not to have
to worry about micromanaging all of your investments. You know, just, as you get older, to know
that there’s more of a regular income coming in at that time when you’re less able to
control all of that and manage it just mentally, yourself, is really good. But it is a hard
sell, because you really do need to look at it as insurance against living too long, rather
than the investments. And so, you really need to not invest too much in this, because it
is a risk. But to really look at what this extra big bump-up in payout could do for you
by then.
CONSUELO MACK: So, here’s the scary part, is that, you know, talking about this, it
makes sense. Especially given the financial crisis that we’ve just been through, the
fact that so many baby boomers now are facing their retirement and they’re not adequately
prepared, as we all know from the statistics. But the scary part is that we have just been
also through a crisis where we’ve seen some major financial institutions go bankrupt,
have to be bailed out by the government. So how do I know, how can I be assured, that
the institution that I am ensuring with is going to be around to pay my longevity insurance
in 30 years, or whatever?
KIM LANKFORD: You need to think about this in the very long term, because you are counting
on this to pay out for 20 or 30 years. And, I mean, looking at financial strength ratings
definitely helps. We saw, you know, they’re not perfect. But, it’s at least a really
good step. And, as you said, the laboratory of 2008 was very interesting to see what happened
then, so you can really learn a lot. Because in immediate annuities, generally, you’re
looking at who’s paying out the most. And there’s a lot of calculators that help you
find out who’s paying out the most, but you’ve got to take that second step. You’ve
got to look beyond it. And a lot of times, you’ll find out some very strong companies
are still paying out very high, so you don’t have to sacrifice payout in order to get a
strong company. But make sure you’ve got both of those pieces together.
CONSUELO MACK: One Investment for long-term diversified portfolio. What should we all
own some of? Chris Blunt?
CHRIS BLUNT: I’m going to cheat and give you two, because I think the power is the
combination of the two. Shockingly, you know, one would be a guaranteed lifetime income
annuity, or an immediate annuity from an insurance company. And we talked about, you know, building
a floor of guaranteed income, you know, peace of mind, et cetera. But I would actually couple
that with portfolio dividend-paying stocks. And the reason for that is between the two,
you get some of that inflation protection, that, frankly, you can only get from equities.
You know, some ability to offset some of that inflation risk, a little bit of growth. And
the two actually dovetail very nicely together.
CONSUELO MACK: You are allowed, only this once to give two for the One Investment for
a long-term diversified portfolio. Kim, what’s your recommendation that we should all own
something of?
KIM LANKFORD: And mine is on the same theme. It is some source of guaranteed lifetime income.
And when you’re in your working years, maybe it is working with a company that has a punch-in
that you can count on. And be very careful of keeping track of what those vesting requirements
are. If you’re a year or two before you get vested in it, think very carefully about
whether you want to stay there for an extra few years, if given that choice. I know fewer
people have that option. But, you know, either looking at the pension, or looking at it from
an immediate annuity, or some sort of longevity insurance. But thinking even before you retire
about how you’re going to get some kind of lifetime income.
CONSUELO MACK: And it sounds as if, talking to the two of you, that you really do need
to think in terms of that there are now more pieces to add to your retirement planning.
It’s not actually getting simpler. It’s getting more complicated. Am I correct about
that? Your grandmother’s pension, or even your father’s pension, in planning, no longer
does the trick.
CHRIS BLUNT: Well, I think pension’s the right word. I mean, I think what we’re hearing
from consumers is they want their pension back. And the problem is, no one wants to
give it to them anymore. Their employer can’t afford to give it to them. The government
can’t afford to give it to them anymore. But they can create a pension, but they have
to do it themselves, and it’s complicated, because, unlike an accumulation, you’re
not just dealing with the asset side of the balance sheet. You have to understand the
liability side, and how they tie together. So I’d agree that I think it’s infinitely
more complicated.
KIM LANKFORD: And, the good thing is, though, once you figure out how you could do that,
how you can provide some source of lifetime income, then that does make the other part
a little easier. You’re not always just kind of crossing your fingers, wondering if
the rest of that money’s going to make it for the rest of your life. You know that you’ve
got a little piece coming in, and then you can manage the rest of that money with a little
less stress.
CONSUELO MACK: Which is a tremendous relief, if you can actually achieve that. So, Kim
Lankford, so great to have you here, from Kiplinger’s. Chris Blunt, thank you so much
for joining us from New York Life as well, on WealthTrack.
CHRIS BLUNT: Great. Thank you.
CONSUELO MACK: One additional recommendation from Kim Lankford was to check out the recently
introduced Fidelity Income Strategy Evaluator. Kim says it is very useful in helping individuals
understand and personalize their transition from saving to spending for retirement. You
can find it at fidelity.com/income strategy. And we will provide a link on our website,
wealthtrack.com
And on that note, we will conclude this edition of WealthTrack. Next week, two investment
pros will discuss investment strategy and asset allocation. BlackRock’s chief equity
strategist and large cap fund manager Bob Doll will join Morgan Stanley’s chief investment
strategist and asset allocation master David Darst. Thank you for watching and make the
week ahead a profitable and a productive one.
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[music] SPONSOR: The company keep is also the company
we keep. Together we'll provide lifetime guarantee
income and investments solutions.
SPONSOR: Additional funding provided by: Loomis-Sayles - investors seeking the exceptional
opportunities globally. Research Affiliates - Efficient index foreign inefficient market.
The Wintergreen Fund - your home for global value.
Rosalind P. Walter
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