Overcoming our own biases against certain products can be a key factor in helping our client’s secure guaranteed income to cover their guaranteed expenses in retirement.
For instance, let’s use myself as an example. I’m a chicken. A fully fledged, 100 percent organic, made-in-the-USA, never-frozen chicken. Why the confession? I’m revealing my own flaw in investment strategies, which is that I’m scared to death of market risk, so I try to avoid it.
How is it a flaw? Logically, I know I’m far too young to worry about market risk, and at my age I should be taking far greater risk than I am in all my investments. But the thought of 2008 still paralyzes me. Fear is a powerful motivator.
Safety and anything that looks, smells and feels safe, all the way from the bank account with its FDIC guarantees to insurance-based products that are layered with contractual guarantees, make my heart sing. I have self-imposed blinders to investment opportunities that scare me solely due to risk, despite the fact that I have risk capacity. I, my friends, do not have a risk tolerance.
As a result of my own personal bias, I can’t help but weigh heavily in safe money solutions when planning retirement incomes for clients. The good news is that the cases I design with advisors typically involve much older clients, who tend to have waning risk tolerance as a general rule, but also less risk capacity.
Many of the cases involve both husband and wife retiring simultaneously, leaving them without not one, but two paychecks. They have many options on how to replace their income, but I find that sometimes advisors limit the options they are willing to consider for their clients.
I find that advisors sometimes have heavy biases, particularly in the way that they generate income for their retiring clients. Generally, much of their rationale goes back to their original training, which in itself was typically biased, particularly if proprietary product was available. The Ford man is never going to tell you to buy a Chevy, right?
One of the reps I work with shared with me his training in one of the largest wire houses. I asked him, “Did they discuss annuities with you at all?” He said, “Sure, they showed us an annuity that had a very long surrender period, with high surrender charges, low caps, that had a big bonus that had to be annuitized at very low internal rates of return to maintain that big bonus.” I can’t imagine why this guy disliked annuities 15 years later, can you?
When was the last time you looked at the way you plan — removed all blinders, opened your mind, challenged your own belief system and reviewed all the wonderful ways you can provide guaranteed income?
We all understand there are lots of ways to generate income, some with better tax efficiencies than others, but is there risk associated with that income as well? Can you guarantee clients will always be paid dividends? Can you guarantee your careful management of their account will always guarantee they can pull 4 percent of assets and not run out of money?
How safe is your client’s income — their actual monthly paycheck — if there were another crisis similar to 2008? Would your client be angry with you if they realized there was a way to guarantee them additional income and you didn’t offer that option?
My observations from working coast to coast with advisors have given me one consistent perspective on what clients are actually clamoring for:
Clients are worried about generating income in retirement.
Clients are concerned that they will run out of money.
Through my professional experience and humble opinion, Social Security does not cover all expenses in retirement. Few people have pensions today, and if they do, many times, it’s still not enough income to cover their guaranteed and essential expenses. So, if their guaranteed expenses exceed their guaranteed income, doesn’t it make sense to generate that income on a guaranteed basis no matter how long they live?
Using a small portion of your client’s assets for income dedication in an annuity can be a powerful way to ensure their lifestyle remains the same regardless of what the future might hold with the market. An annuity may be just what they need to become or remain your client in the future.