10 minute read
Donald Rumsfeld Would Have Made A Great Annuity Advisor
How advisors can prepare clients for the “known unknowns” in retirement income planning.
By John Rafferty
Former Secretary of Defense Donald Rumsfeld was nothing if not provocative in his press conferences. Twenty years ago, during the buildup to the Iraq war and the premise of Saddam Hussein’s regime harboring weapons of mass destruction, he addressed the news media in a 2002 press conference.
“As we know, there are known knowns. There are things we know we know. We also know there are known unknowns. That is to say, we know there are some things we do not know. But there are also unknown unknowns — the ones we don’t know we don’t know.”
When it comes to retirement income planning, it is good to be aware of each of these conditions and to plan accordingly.
Known Knowns
» We should know how much Social Security income our clients likely will receive, and whether they have any other sources of lifetime income such as pensions.
This information should be the foundation of a plan, with few to no surprises in store for clients.
Known Unknowns
» Two of the biggest unknowns that we know of are mortality and market performance — specifically the timing of mortality and the timing and scale of market performance.
Unknown Unknowns
» This one is a bit different. BusinessDictionary.com defines “unknown unknowns” as follows: “Future circumstances, events or outcomes that are impossible to predict, plan for or even know where or when to look for.”
From a current events standpoint, its fair to say that the COVID-19 pandemic that began in 2020 falls into this category. Nobody was anticipating anything like the virus ripping around the globe and shutting down economic activity for extended periods. Nor was anybody anticipating that the market would recover and reach new highs while the pandemic still raged.
It’s the middle category — the known unknowns — that would seem to be the area where planners can provide the most value to their clients. This is particularly true for planners with clients who are within about five years of retirement and have healthy retirement savings but no pensions waiting for them.
These clients are both lucky and unlucky at the same time — lucky to have had great careers, earned a good living and saved substantial sums, into the seven figures in many cases. But they are also unlucky in that without a pension, the bulk of their retirement cash flow must be generated from their own assets, with no guarantees.
And with no guarantees, two key unknowns loom large. The first unknown is the timing and scale of market performance on which their portfolios will rely for growth. Will markets climb before and during the early years of retirement and spare them the agony of a bad sequence of returns — or not?
The second known unknown is mortality. Will they live until age 75, 85, 95, 105? How about their spouse? Think of it this way — for a healthy 65-year-old couple, if you assume each of them dies within 30 years if they plan to age 95, there are 900 combinations of mortality timing (30 x 30) that are and will remain unknown. This means that planning with precision for income needs and wants over a 30year period without guaranteed solutions is difficult at best and likely to be highly inefficient.
Easing The Known Unknowns
A fixed indexed annuity with a guaranteed lifetime withdrawal benefit removes the ill effects of those two known unknowns, improving the efficiency of the planning process. The FIA can be structured to provide guaranteed cash flow to both spouses for life. With some time to bake the guarantees for a few years prior to starting withdrawals, cash flow can be in the range of 6% to 7% of the purchase amount for life. In this super-low-yield environment, that’s a nice core cash flow to supplement Social Security.
More to the point, with rates likely to continue rising over time and hurting fixed-income values and with equity valuations today trading near all-time highs, assumptions about future returns from the capital markets should be looked at with a jaundiced eye.
For example, the last time the Shiller Cyclically Adjusted Price Earnings ratio (named for its creator, Yale University professor Robert Shiller) was at the levels it closed at on Oct. 29, 2021 (about 39), was in the tech bubble years of 1999, 2000 and 2001. (Source: Shiller PE Ratio by Year (multpl.com))
A $100,000 investment in the S&P 500 Total Return index on Jan. 1 of each of those years produced tepid results five years later. That $100,000 was worth $97,000, $89,000 and $102,000 by yearend 2003, 2004 and 2005, respectively. In contrast, the past five years have seen spectacular results, but the Shiller CAPE was much lower on Jan. 1, 2016, at 24. That same $100,000 invested on Jan. 1, 2016, more than doubled to $203,000 by the end of 2020. Recency bias, anyone? (Source: moneychimp.com, CAGR of the stock market)
As good a harbinger of future equity returns as the CAPE has been, nobody knows what markets will look like next week, let alone in five years’ time. But for clients looking for more certainty and less probability in their income planning, an FIA with a guaranteed lifetime withdrawal benefit can be a powerful tool. Today’s more competitive products can guarantee a lifetime cash flow of 6% or 7% or more of the original purchase payment, covering both spouses.
Think how comforting that kind of cash flow reserve would be in five years should markets lose steam, and how valuable that core cash flow can be in allowing any depleted portfolio values to be restored over time without being burdened by withdrawals while markets are down.
Donald Rumsfeld, we hardly knew ye, but your work on known unknowns remains a valuable tenet of retirement income planning for today’s pensionless masses. The annuity industry has a solution for addressing the two biggest known unknowns: mortality and markets.
John Rafferty is principal at Rafferty Annuity Framing, Spring, Texas. John may be contacted at john.rafferty@innfeedback.com.
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South Dakota ACA plans took the biggest jump in 2022 – 23% over 2021
Georgia ACA plans took the biggest drop in 2022 – a decrease of 41% over 2021
Health Insurance Costs To Stay Nearly Flat In 2022
SOURCE: ValuePenguin
Inflation is hitting nearly every segment of the economy, but health insurance doesn’t appear to be one of them. A ValuePenguin.com analysis found that health insurance costs for those who get an Affordable Care Act plan have remained mostly steady — with a 0.67% increase in average premiums from 2021. That amounts to an average premium increase of $48 per year.
The analysis found that in 2022, Americans will spend an average of $541 per month, or $6,492 per year, on an ACA plan.
However, the analysts found significant variations in premiums across states and types of insurance plans. West Virginia, South Dakota, Wyoming, Vermont and Louisiana residents will pay the highest health insurance premiums in 2022. Georgia, New Hampshire, Maryland, Minnesota and Colorado residents will pay the lowest.
Meanwhile, South Dakota, West Virginia, New Mexico, Arizona and Texas will experience the biggest jump in health insurance costs in 2022. Georgia, South Carolina and Nebraska will see health insurance costs decrease the most in 2022.
NONMEDICAL BENEFITS TO GROW 20% BY 2026
Workers want health insurance and related medical benefits, but they also want something more. With the onset of the COVID-19 pandemic, workers became increasingly concerned about their financial security and emotional and physical well-being. This led to a growing employee appreciation for nonmedical benefits such as paid family medical leave, life insurance, disability insurance and wellness programs.
A LIMRA/EY study predicts this increased demand, combined with the fierce competition for top talent, will drive nonmedical workplace benefits to grow 20% by 2026. Some of the factors
leading the charge include a more diverse workforce spanning five generations, and a war for talent that makes benefits a crucial part of recruiting and retaining workers.
Two-thirds of midsize and large employers expect their number of benefits offerings to expand to address the needs of multigenerational workers. Meanwhile, the study showed that 76% of employers said they believe their workers will expect a wider variety of benefits options in the future.
MEN SHY AWAY FROM SEEING THE DOC, AFLAC SAYS
Life can seem like an endless number of to-dos, with top priorities getting the most attention. For many men, however, taking care of their health may not make the list.
According to Aflac’s 2021 Men’s Health Issues Survey, in the past year, 45% of men
did not go to the doctor for an annual checkup, 60% missed going to their eye doctor and 54% did not see their dentist.
Aflac’s survey revealed twothirds of men said they do not feel well- informed of the ailments that commonly affect men.
Another barrier for men going to the doctor is financial concerns. In the past year, nearly half of men said they postponed or avoided medical treatment due to medical costs, the Aflac survey revealed.
QUOTABLE
Nearly half of those we surveyed (47%) say they are more afraid of falling than getting cancer.
— Holly Snyder, president of Nationwide’s life insurance business
HALF OF LTCI CLAIMS BEGIN AFTER AGE 80
If you live a long life, the likelihood you will need some kind of long-term care increases exponentially. So how old are most people when they get to the point where they need care?
Half of long-term care insurance claims begin when policyholders are in their 80s, according to the American Association for Long-Term Care Insurance. About
27% of claims begin between age 80 and 84, with 23% between ages 85 and 89. Twelve percent of claims begin when the policyholder is age 90 and older.
But the average age for those buying new LTCi policies is nearly 30 years younger than the average age of those making claims. The association reports the average age for those buying new traditional long-term care insurance policies remains between 56 and 57.
DID YOU KNOW ?
64% of households that experienced a COVID-19 diagnosis had out-ofpocket health care expenses in the past 12 months, compared with 45% of other American households. Source: Aflac
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