If you sell annuities, or sell against them, you’ve certainly encountered a sales pitch boasting a higher guaranteed withdrawal rate vs. a “safe” withdrawal rate from a stock/bond portfolio. Numerous studies confirm that a 4 percent withdrawal rate from a standard allocated portfolio will survive over the worst 30 year period in the equities markets. A current FIA with GMWB will pay a 66-year-old male a 5.32 percent guaranteed lifetime withdrawal. So, even my 3-year-old daughter can deduce that 5.32 percent is better than 4 percent.
This exact tactic is used nationwide by annuity sales folks. What they don’t tell you is that, according to those same proven Monte Carlo simulations, illustrating a safe 4 percent withdrawal rate, more than 90 percent of those portfolios will have preserved all their initial principle. With this new information added to the equation, most people would decipher that equities (stocks/bonds) with a 4 percent withdrawal rate are the better choice for retirement.
Now, it is important to explain that a large portion of my income is directly linked to annuity sales. It is a true passion and earnest pursuit of mine.
So why am I exposing the flaws and ethical chinks in the armor for a common sales tactic of the product I love?
Because I firmly believe there is a better way to pitch this, and furthermore, it allows us to be planners and not sales folk. I also believe that creating a justly beneficial plan for your client will stand up to others who are competing for those dollars and you will both feel better about the sale. I would even argue that you will feel more confident and more empowered to make more sales.
Annuities have a higher guaranteed payout over the 4 percent safe withdrawal rate? Yes, but assuming the high probability of the portfolio being preserved with equities what does your proposal really look like? What we need to do is craft a more holistic solution and acknowledge the high potential of portfolio preservation when it comes to the stocks and bonds approach, which is often the annuity sales person’s biggest competition.
Use the extra 1 percent to your advantage.
The concept is pretty simple. If a 66-year-old male client has $500,000 of retirement (ignoring taxes and inflation in this illustration), and they take 4 percent per year from a standard 60/40 allocation portfolio, they will pay themselves $20,000 a year and they will have a 90 percent chance of all $500,000 being there when they die in 30 years. A FIA with GMWB (I am using the TargetHorizon with TargetPay for this example) will pay the same 66 year old male $26,645 for the rest of his life. I took the $6,645 difference and placed it in a permanent insurance product.
I ran a few illustrations on GUL/UL/IUL chassis, and I got death benefitsranging from $288,000 to $500,000+ based on the product. It’s important to note that it’s the concept here, not the exact dollars. If a client wants to match the exact amount of their portfolio it’s going to vary on their age, health and type of product they select. If we are considering an IUL or UL, performance will also be unknown.