Eric and Dick tackle the question of how much you should allocate to annuities when developing a sound retirement income and estate plan.

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**Guarantees, including optional benefits, are backed by the claims-paying ability of the issuer, and may contain limitations, including surrender charges, which may affect policy values. During this segment, Dick and Eric are referring to Fixed Annuities unless otherwise specified.

GAO Report Tells Americans: Buy More Annuities!

The U.S. Government Accountability Office (GAO), a non-partisan federal agency focused on reducing wasteful government spending, has released a report entitled Ensuring Income throughout Retirement Requires Difficult Choices. The two most important choices involve:

• Delaying the age when you elect to start receiving Social Security payments; and
• Converting your cash-balance defined benefit pension into a lifetime income annuity rather than take a lump-sum payment upon retirement.

Social Security is Not Enough for Retirement

For those of you that think Social Security will meet your retirement needs, wake up! Given the massive debt overhanging the U.S. economy, the current generous benefits being paid out to retirees is not sustainable. As the GAO report states:

The cost of Social Security benefits is projected to exceed sources of funding, and the program is projected to be unable to pay a portion of scheduled benefits by 2036. In 2010, for the first time since 1983, the Social Security trust funds began paying out more in benefits than they received through payroll tax revenue.

Due to the long-term fiscal challenges facing Social Security, options for reform may result in lower benefits and reduced replacement rates from Social Security. As a result, reforms to the Social Security system may increase the need for retirement income from other sources such as private pensions.

Even under the current generous benefit schedule, social security cannot be relied on to fully replace a person’s pre-retirement salary. According to the GAO report, for low-wage earners (i.e., 45% of national average) social security replaces only 55.2% of pre-retirement income and for high-wage earners (i.e., 160% of national average) the replacement rate is only 33.9%.

by Jim Fink on April 19, 2012 at Investing Daily

Annuity Guys® Video Transcript:

Eric: Today we’re going to talk about what percentage of your portfolio should be allocated to annuities, and the magic number is, get right to the point.

Dick: Exactly 50%.

Eric: There you go, thank you very much for.

Dick: Video over. Wouldn’t that be nice?

Eric: Unfortunately, it doesn’t work that way. Everybody wants the magic answer of what exactly needs to go into an annuity?

Dick: Well, even the GAO which we’re going to talk about here, the Government Office of Accountability did a report last year in June that pretty much hit in July, and actually it’s even on the cover of our book that the GAO is recommending that everyone has more annuities and less securities, so that was the overall assumption that they were making.

Eric: I think it’s looking at the dependence people have on other; when you’re getting to retirement what percentage can you count on Social Security to cover, of your retirement income? The funny thing is you look at low income people in the article we utilized, it’s 55% of low income people, they’re income need is met by Social Security.

Medium wage earners is about a third of their expected income is met by the Social Security income, so how are you then going to supplement; what sources are you going to use to supplement your income and retirement after Social Security? Social Security is not going to do it.

Dick: Right. It won’t cover everything that folks need, so if we take—it’s hard to stereotype, because everybody’s situation is obviously different, but if we take what the GAO report is saying in a summary sense, and say that those folks that are somewhere in that median asset range, where they’re relying more on their Social Security that they would have a tendency to need to put a lot more of their portfolio into a safety and security, that will **guarantee their income throughout their life.

Eric: Right and we talk about this a lot with our clients in talking about the foundational portion of your income, so you take your building blocks. You know you’ve got Social Security, as much as we can count on it to be there. We always like to think of what the COLAs and the things, the increases are going to be.

Dick: Cost of living adjustments.

Eric: Yes, but are we certain that those are going to continue with the way that things are right now? You never know, so if you’ve got Social Security as the base, what do you need to add on top of that each month, to meet your monthly income need? That’s your foundation, a minimum amount, not your trips, not your fancy expenditures, but what’s your basic necessity expenditure need to be? Do we build that with– we always say build it with conservative CDs, annuities.

Dick: If you’re going to do investments, you may have it in bonds.

Eric: Look at the most conservative options out there and utilize those to build that income stream.

Dick: Right and this is where annuities do come in and they work so well, because the one thing that the CDs and the bonds and different things don’t address is longevity and that is outliving our money or another way to say it is, Eric just not dying on time.

Eric: That’s right. When we look at people that utilize CDs, they typically just pull the interest, but if you’re having to utilize the principal to meet those basic necessities that’s really where an annuity comes into play, because it gives you that added layer of insurance that you’re not going to outlive your income.

Dick: Exactly, and so it comes down to the percentage to allocate to an annuity some of this we find, when we’re working with our clients, gets down to that person’s risk aversion. Are they the type of person that’s basically grown their portfolio in a very safe and secure way, and they value annuities for what they do, in terms of safety, security, and controlled growth or are they the type of person that’s been very aggressive with their portfolio, so they’re very comfortable with not having much in safety and security. They may have a very large portfolio, and feel that they’ve got the room to have a very small foundation of safety aspect of corporeal.

Eric: If you’ve got such a large asset base that even if you shock tested it and said, “If we lost half of it and it still is enough to meet your basic income needs.”

Dick: Right, carry us through, throughout our lifetime, right.

Eric: Now for some people when they say, “What’s the percentage?” My answer’s always “The smallest amount that we need to meet that basic need.”

Dick: Exactly, and what we like to do and a lot of the advisers that we’ve worked with, like to do for clients is to look at that objective and figure out what that income need is, and then find the least amount of money that we have to spend to get the proper annuity that meets that need, and that could be Eric, an immediate annuity. It could be a hybrid style annuity.

Eric: Then it’s what options do you want? Immediate may give you a bigger payout, but you’re giving up your asset. A hybrid style may be a little bit less income, but you have a lot more flexibility, as well as some other options with long-term care potentially, or other rider pieces that come into play.

Dick: One thing, folks, that you really always want to keep in mind on anything that you allocate to annuities, especially if you’re allocating for some reason a lion’s share of your portfolio, you always want to keep something available that’s liquid. It should be fairly sizable, because we don’t know what type of emergencies might arise.

Eric: We always talk about inflation, and how are you going to gauge for inflation, and you’re better off to have assets out there that continue to grow, that can continue to work against inflation, especially if you’re set on a level, if you take an immediate income or an immediate annuity and it’s level, how are you going combat increases in expenses?

Dick: That’s one thing, folks where the hybrid style or the fixed index annuity with the income rider works so well. If you can maybe have a portion of your income that, if you need income right away, that you can go ahead and maybe set that up in an immediate annuity or one of your investments or some other area of asset in your portfolio that you can pull money from, while you allow that hybrid annuity to defer over five or ten years. It’s a great inflation hedge to get that income boosted up pretty dramatically.

Eric: I like to call it laddering annuities or laddering and if you haven’t seen that video you can actually look for that afterwards, because there should be one out there. There are strategies to basically, help you as the GAO says here.

Dick: We will put this on the blog site, so that you can see the full report and the article that we’re reading from that addresses Social Security, and again how to maybe, use strategies with annuities for Social Security. Eric, if I ask you the question this week what’s the proper allocation to put in an annuity?

Eric: My answer is the smallest amount that meets your foundational needs.

Dick: I like that. Eric did not say, “Well, it depends.” That’s my famous line, “Well, it depends.” I think you’re right Eric, and I think that it also depends on… Here we go. It also depends on the individual preference for safety and security. We have to always take that into account.

Eric: Yes, it should be suitable for your investment style. Very good; thank you very much for tuning in today.

Dick: Thank you.

The post What Percentage of Your Portfolio Allocation Should Be Annuities? appeared first on Annuity Guys®.

This week Dick and Eric discuss the last 14 risks retirees face and how an annuity can be utilized to address some of these potential concerns.

**Guarantees, including optional benefits, are backed by the claims-paying ability of the issuer, and may contain limitations, including surrender charges, which may affect policy values. During this segment, Dick and Eric are referring to Fixed Annuities unless otherwise specified.

1. Tax Risk – Significant tax increases or elimination of tax benefits.
2. Loss of Spouse Risk – Planning and financial hardships that arise upon the death of the first spouse.
3. Unexpected Financial Responsibility Risk – When the client acquires additional unanticipated expenses during the course of retirement.
4. Liquidity Risk – The inability to have assets available to financially support unanticipated cash flow needs.
5. Legacy Risk – The inability to meet the philanthropic and/or bequest goals that the client has set.
6. Financial Elder Abuse Risk – An advisor or family member preys on the frailty of the client, recommends unwise strategies or investments or embezzles assets from the client.
7. Reemployment Risk – The inability to supplement retirement income with part-time employment due to tight job markets, poor health, and/or care giving responsibilities.
8. Home Maintenance Risk – The inability or unwillingness of clients to continue household chores and activities that they once handled themselves, which may require financial resources to pay for these outsourced activities.
9. Timing Risk, also known as Point-in-Time Risk – Considers the variations in sequences of actual events beginning with different time periods.
10. High Debt Service Risk – Clients retiring with significant mortgage, student loan, and/or consumer debt that may erode the resources needed for retirement spending.
11. Procrastination Risk – Clients started saving for retirement too late.
12. Retirement Saving Opportunity Risk – Working for an employer that did not provide a retirement plan.
13. Inadequate Resource Risk – Clients have not saved enough to provide adequate retirement income.
14. Unrealistic Expectation Risk – Client makes poor choices because he/she was not properly educated, or remained unaware, about the consequences of insufficient retirement income planning.

Read the 28 Risks Retirees Face – Part 1, here.

Annuity Guys® Video Transcript:

Eric: Today we’re talking part two, of our 28 risks to retirees. We left off on number 14, so we’re going to tackle the second half here and start with number 15.

Dick: I’m ready for number 15.

Eric: All right, and its tax risk. It’s basically what happens if they eliminate certain tax benefits or if perhaps maybe, the tax brackets increase.

Dick: Let’s take an informal survey here, Eric. How many people think taxes are going to be going up in the future? How many people think taxes are going to be going down in the future?

Eric: So there is some tax risk out there especially when you’ve got things like IRA’s, which are not being taxed now, they’re going to be taxed when they come out on the other side.

Dick: Right. Well, we’ve got Roth’s, which offer a great tax benefit and there’s always the possibility that that could be taken away.

Eric: Right, that was with our public policy risk from last week, and if you don’t know what we’re talking about, I encourage you to check out last week’s video.

Dick: Life insurance. That’s another one. It has a lot of great tax advantages.

Eric: They’re tax-free, tax deferral, [unintelligible 00:01:14].

Dick: Annuities, so as we face all of these possibilities one thing we’ve told our clients, because they’ve asked us the same question, “Well, if I go ahead and go forward with this plan, what assurances do I have that the government won’t change the rules and disallow this for me?” Well, there are no assurances, but one thing that we have been able to say with some confidence, is that in the past, the government has grandfathered those that acted in good faith, and were using a viable strategy that was allowed by the IRS, but the new folks trying to get into that strategy…

Eric: Right, it goes away, usually. I guess what we’re saying on tax risks don’t wait for the rules to be changed, because then it is too late.

Dick: Exactly.

Eric: Interesting, the next one here we had a little too much fun probably with this; loss of spouse risk.

Dick: Yes. Well what can annuity do to replace your spouse, Eric?

Eric: Well, in this case replace the spouse…

Dick: I don’t think that’s what they’re talking about, do you?

Eric: It’s not go out and get yourself a new one, but it’s the financial. Each spouse brings a financial benefit hopefully to the arrangement, and what happens when one is gone?

Dick: It makes a big difference, and many times it’s not factored in properly, and usually there will be one spouse that will be in a better position, if they lost the other spouse financially, than the other spouse would be, because it would create a great hardship. So you’ve got to determine which one is, maybe at the greatest vulnerability in the plan.

Eric: And pension factors, social security impacts, what happens. And you hate to sit there and do the math on it, but you have to know what the impact is going to be if one spouse is gone, and how it’s going to impact, not just the financial aspect, but then there’s also replacing some of the service aspects and things that they do around the house. Little things go a long way, here.

Dick: Right, number 17?

Eric: Unexpected financial responsibility risk.

Dick: Where something blindsides you, and you’re caught unaware with a huge bill.

Eric: Yes, I always think of the kid that is going to move back home with me or the parent that’s going to move back in with you.

Dick: Or the child or grandchild that had an unexpected health need, that wasn’t going to be covered by insurance.

Eric: Right, what happens when the unexpected happens?

Dick: And you need to get your hands on that money when you need to spend some of it.

Eric: So it’s having that bundle, so to speak of dollars, available for that unanticipated need.

Dick: Right, right. And in some ways that isn’t a job for an annuity, so you really have to think in terms of an annuity, how can I position this money and leave it alone, so that I’ve got additional money for those unexpected things that may happen.

Eric: It’s having that resource though. Then we have liquidity risk, so by liquidity risk we mean having basically, cash on hand. It’s that ability to go get and take and walk away.

Dick: Which goes back to what we were saying, don’t put too much money in any one area without having some liquid money. Another good example of that area could be stock.

Eric: Right, stocks. It’s even annuities.

Dick: Sure.

Eric: If you over-obligate too many of your dollars into resources where, if you’re going to have to go get them out, and take a penalty for having to go get them.

Dick: What happens if the markets fall?

Eric: Well, you’re buying high and selling low, so you’ve just reduced your principle.

Dick: So you don’t have the liquidity, unless you want to shoot yourself in the foot.

Eric: And the same thing, if you’ve spent too much on a CD or an annuity, you’d have to go in and get it out early and there’s a surrender or a penalty. Those things can impact you negatively, as well. It is having the right amount in liquidity in place, and the flexibility in your plan to be able to go get those assets.

Dick: Another risk concern, it doesn’t really affect everyone but we do have clients that it is important to, and that is their legacy. They want to leave something behind.

Eric: Yes, charitable giving. I see hospital wings with people’s names on them.

Dick: A scholarship, some type of a benefit that they want in their memory.

Eric: That they want to leave money for this. Well what happens, if what you think you’re going to leave is depleted by either poor market returns, living too long, I mean sorts of legal things. So how is your legacy going to be impacted by [inaudible 00:06:32]?

Dick: And if it’s important to you, then you have to consider how you’re going to make that real.

Eric: Yes, so number 20 here is very interesting, financial elder abuse risk. Now we were talking a little bit about little known laws, that require children to provide for their parents.

Dick: Yes, yes. In many of the states; and I was just reading this recently and maybe we can do a little bit more of an expose on it in future videos; but that a lot of the states have laws on the books that actually require the children to take care of the financial responsibilities of the parents, if the parents cannot handle. So a few of the states have tested this a little bit, and some children have been called into play and even, may potentially face criminal activities, for not supporting their parents’ needs, when the parents thought that their poor planning or poor decisions would not affect the children.

Eric: Right, and then it goes back to more, I would say the more common aspect, where the children don’t make good decisions, or they have a financial adviser that takes advantage. Things that happen along the lines to basically deplete the resources, thus abusing the parent/child relationship, financially abusing it.

Dick: Number 21, in the time period that we’re in, with employment numbers the way they are, for retirees they do face the challenge if they would lose a job, a part-time job, a full-time job. Maybe it was supplementing their income. Will they be able to get reemployed?

Eric: Right, we joke somewhat and the Wal-Mart greeters are going to be…

Dick: Yeah, replaced by security cameras, and…

Eric: The jobs that you think you are qualified for as a retiree, sometimes you’re over-qualified, and it’s tougher to find those jobs. A lot of people didn’t really anticipate having to go back to work, and things have changed. So that reemployment risk or needing to be reemployed…

Dick: It can be serious, if you’re relying on it.

Eric: Number 22, is home maintenance risk, which if you’re a homeowner, you know what it takes to maintain it right now. Well, as your resources are depleting, all of a sudden you think your house is paid for and everybody talks about “my house will be paid for by then.” But will it need a new roof? Will it need a new furnace?

Dick: Right and another area of vulnerability on this Eric, that a lot of times folks don’t look at are reverse mortgages. A lot of folks say, “Well, I’ll get a reverse mortgage. It’ll take care of me. Give me that equity, out of my home.” But then you still have to maintain that home. If you cannot maintain that home, then you could be in default on the loan.

Eric: True, if it goes into a state of disrepair and the other aspect of even being elderly is being able to maintain, if you’re physically not able to do the chores. The lawn mowing, the upkeep, those things come into play, because you have to hire those things out, a lot of the time.

Dick: Right. Well, timing risk, that’s another thing in terms of what catastrophic things that might happen.

Eric: Yeah, I think it’s the actual events that impact all of us financially and some of them are unpredictable. A tsunami wipes out the entire town, an earthquake.

Dick: Tornadoes.

Eric: They can take away your business. They can take away your home.

Dick: Are you properly insured, this type of thing?

Eric: Exactly, and it’s that you can control and things that you can’t control. What’s going on in Europe right now is an actual event that’s happening that’s impacting our ability to earn and save, because of a financial crisis that wasn’t of our doing.

Dick: It all gets down to some point in time, that we have no control over, and so if timing is in our favor it goes very well, and if timing’s not, we can’t afford that in retirement.

Eric: Right, it’s just the times we live in, basically. You can’t change the time. All right, what about number 24 here, high-debt service risk.

Dick: Well, I think that most retirees want to say they’ve got their home paid off. They own their cars. They’ve got some money in the bank, and obviously we’re very fortunate ourselves but also a lot of the clients that we work with, that have gotten themselves in a very good position financially. But we do talk with some folks occasionally that will have some pretty sizable debt going into retirement. This can turn around and bite you, especially if you’ve got a variable rate mortgage or something of that nature.

Eric: Variable rate mortgages, buying that new house right before retirement sounds, “Oh, it’s beautiful. It’s what you always dreamed for,” but it comes with a new price tag. I always talk to a lot of clients especially in their 40’s, about spending money on college. Well, those college loans, they let you defer, defer, defer well all of a sudden, your son or daughter who’s the doctor now and 12 years of accumulated college loans that you’re on the hook for. You can pay them off over the next 20 years. Well, you’re in retirement now and you’re paying off your kid’s college loan still. How much of your retirement dollars, have you put into paying off those pieces?

Dick: Exactly, you’ve lost the time value of the money earning and growing. So I do think that when we look at the high debt situation, that we do have to also, recognize that there are way that you could have debt, and yet have the money set aside to service that debt. To pay that debt off in full and you could be earning some arbitrage, making some money on your money, and so there are ways to do that effectively. We don’t want to just say that everything has to be paid off. There are smart ways to be in debt.

Eric: Yeah, there’s strategies, if you don’t do number 25, which is procrastination risk.

Dick: There you go, I like that. Nice segue.

Eric: Yeah, we planned that very carefully. We hear this all the time, the rates are too low. The rates are going to improve. I’m going to wait til next year.

Dick: I can think of dozens of examples dating back to 2008-2009. “I’m just not going to do anything. I’m going to wait.” Well, how well has that worked for you?

Eric: What’s the impact on your retirement on waiting, starting too late? We always talk about, if you’re going to save for retirement if you put the same amount of money in between the ages of 20-28 and then stop; is the same as putting it in from the ages of 28 to almost age 60; so it’s just because of the compounding out there and my math’s probably off a little here, but it’s truly what you’re putting away. What it costs us to wait.

Dick: It’s what you can put away and how long you can let it grow and compound, so procrastination is probably the greatest enemy to achieving your objectives in retirement. Even though you might think, “Well, I’ve only got five years or ten years,” there are some wonderful things that can be done and annuities can accomplish a lot of these things with **guarantees, so that you know that you’re going to have, at least a certain reasonable income.

Eric: Right, right. All right 26, retirement savings opportunity risk. So in simple standard language it’s working for an employer that doesn’t have a retirement plan.

Dick: Or you just didn’t contribute much to it.

Eric: Well in this case, I think they’re blaming the retiree. It’s the employers fault, because if they were supposed to take care of me and provide for retirement.

Dick: Things have changed.

Eric: Yeah, if you don’t take the onus on yourself that really does impact.

Dick: Right, if you haven’t saved enough it doesn’t really matter if it’s the employer’s fault or your fault you haven’t saved enough.

Eric: And I think what we’re seeing is a generational change, from that defined benefit plan where you worked for an employer, and part of their obligation is they were going to give you a retirement that took care of you, for as long as you lived. That was going to be your benefit for working there for so long. Now we’ve got these 401k programs that are really more an individual’s responsibility.

Dick: Which really ties us into 27, which is the same thing, inadequate resource risk, you just don’t have enough.

Eric: And this is the speech we have with 401k participants, because their thoughts, “I’ll put in the minimum and the employer will put in this much, and I’ll be fine for retirement,” until they start running numbers.

Dick: Yeah, exactly. There’s no silver bullet. If you don’t have enough money set aside, you’re just limited in what you can produce for an income.

Eric: Well, you’re going to have to step down your living. Your standard of living is going to go down, because you haven’t put away enough resources, and it’s tougher to do later in life. That’s that procrastination thing.

Dick: Well and, this is a good place to wind things up. We’re on number 28 and that’s having unrealistic expectations of retirement, and what it’s going to produce. What the results of that retirement are going to be, based on what you’ve saved. The old saying, “We have champagne taste and beer pocketbooks.” That’s a job that an adviser has to help the client a lot times, understand.

Eric: It’s hopefully what we’re doing here with these videos. Talking about and making you aware. We’re trying to educate and present the scenarios here, but you have to take responsibility for going out there and answering some of these questions. You’re now aware. You’ve been educated. You’ve been asked, but you have to make the right decisions going forward. You may not have saved enough to maintain your lifestyle. You’re going to have to make changes.

Dick: Right, you’re going to have to cut back a little bit.

Eric: Your expectation was here, well reality is here, and you don’t have any time left to make it up.

Dick: Or maybe you saved a much larger amount of money than you really need, and you have discretionary income and you can have some in the market. If you lost it, it wouldn’t be the end of the world. On the other hand, you’re in a very good position financially, and you need someone to help you understand how to spend your money.

Eric: And if all of this is overwhelming to you, and you don’t know which way to go, that’s the time to sit down with an adviser. Get somebody that can ask you these questions, if you’re not sure how to answer them, to present you with these scenarios.

Dick: We’ve spent 30 minutes doing these two videos probably, and realistically this would comprise hours and hours and hours of planning with most clients.

Eric: Yes, so we encourage you to sit down, take the time, start working through these if you haven’t already done so. Hopefully you’re working with an adviser that is asking you these questions, and setting the scenarios for you so that you can be prepared. Our goal is for everybody to have a safe, secure comfortable retirement, so these are some of the risks that we hope that you can avoid, and basically have abilities to deal with.

Dick: Absolutely. Well, thank you so much for spending your time, looking at these different risks that retiree’s face. They’ll be on the website, so you can check them out, and read about them. Take them to your adviser and do some serious, good planning.

The post 28 Risks Retirees Face – Part 2 appeared first on Annuity Guys®.