7% Return Dilemma – Flaw of Averages

Retirement planning is done conceptually. Hypotheticals, round numbers and easy-to-understand illustrations are the norm.
This works fairly well to obtain a general idea about your retirement direction and is better than no plan at all. But more often than not, one of the most important aspects of distribution planning is overlooked during the process. Hence…the “7% Return Dilemma”.

The 7% return dilemma works like this – “If I can just average a 7% return on my investments during retirement, I’ll be alright.” Rate of return, rate of return, rate of return. But just as the enclosed picture depicts a 3 foot average deep river, averages don’t always work out. Have you seen the numerous case examples showing 2 retirement plans, both averaging a 7% return? The only difference is one plan’s income lasts 6 years longer than the other. Why? ORDER OF RETURNS (AKA – The Flaw of Averages).

“One of the more compelling aspects of investing is the math of gains and losses. Very simply, a 50% gain does not allow a portfolio to recover from a 50% loss. In fact, a 100% gain is required to restore a 50% loss.” – Dr. Craig Israelsen, “The Math of Gains and Losses.”, 2009

CLICK HERE for a copy of Dr. Israelsen’s full report.

A very successful financial planner I consult, Mike Reese, said it well: “You can achieve your target rate of return and still fail miserably with your planning. In this story, Joe had a big “MAYBE” with his retirement planning. ‘Maybe’ he would succeed and ‘maybe’ he would fail; it all depended on a variable he didn’t control – the market.”

 – CLICK HERE for “Losses & Recovery”Slide, used by Mike & several top producers

To study more on the topic, check out The Flaw of Averages: Why We Underestimate Risk in the Face of Uncertainty, by Dr. Sam L. Savage, John Wiley & Sons 2009.

 – CLICK HERE to view that book’s website and to learn more.

So the next time you’re putting together a client’s distribution plan (thinking about rate of return, asset allocation and investment diversification) – Do your clients a favor…address the sequence of return risk too. More on this to come soon…but this should get your wheels turning.


Worn Out Presentations [3 Items]

The retirement landscape (and marketing into it) is evolving at breakneck speed. One of the top producers I consult always says “If you’re not evolving, you’re dying.” So ask yourself:

  • Am I currently showing clients materials that are timely and relevant today?
  • Or am I using sales materials that are 12-24 months (or even longer…) old?!?
  • Do my handouts, supporting docs and videos feel a little worn out?

Not after today…

My simplistic role in the retirement landscape is to empower. Empower financial advisors to efficient marketing, additional clients and a larger bottom line. Do all that while putting more American retirees in a safe and secure retirement environment. To support that cause, below are 3 incredible client pieces. All 3 were shared by your financial advisor peer group and are already being used successfully in the field.
Steal at your leisure and refresh your support materials ASAP!

Sales Support Item #1
Barron’s “Best Annuity” Article – June, 2011

This 2 page article provides a fair view of annuities & their value proposition. Given how well-respected Barron’s remains for financial news, this should be an article you immediately put in front of clients & prospects.

Sales Support Item #2
PBS NewsHour Video – Is Your Pension Safe? – June, 2011

9:38 video produced by PBS (non-polarizing to most people) about the 50 state pension crunch. This video lays the groundwork to prompt taking action. Don’t rely on the government, your employer or your state to bail you out. Take responsibility for your own retirement security now!

Sales Support Item #3
Insured Retirement Institute’s 2011 Fact Book – June, 2011

190-page fact book with updated details, stats and trends in retirement income planning! You can never say you’re at a loss for information with this in hand. There is more seminar content, presentation ideas and client letter statistics than you could ever use (embarrassment of riches)!!!

Push strong into this summer and I’m a phone call/email/post away to help with anything.

3 Retirement Income Options

When your clients retire and need income, they essentially have three options to choose from. These options are explained very well in the book The Great Wall Street Retirement Scam by Rick Bueter. In his best-seller, Mr. Bueter goes into detail about the pros and cons of each option. We covered this at a training event last week and I received numerous requests for the presentation.  So without further ado, here’s a summary for you to use right away!

3 Retirement Income Options:

1. “The Bank’s Way” to Retirement

Lose your money safely – According to www.bankrate.com (as of May 2, 2011), the average 1 year CD is currently paying 1.16%. According to www.inflationdata.com (as of May 2, 2011) the current inflation is 2.68%. This is what we call a “moonwalk account” – one of Michael Jackson’s claims to fame in which he looked like he was walking forward but was actually moving backward!
Deal with the emotional stress of volatilityCLICK HERE for a chart showing the volatility of CD interest rates over the past 50 years.
Guaranteed income – While there is no guarantee of income for the rest of a retiree’s life using bank vehicles, if using a conservative withdrawal rate based on historical returns, clients with $1,000,000 could hopefully take between $10,000-$30,000 annually and be safely positioned for at least 25 years.

2. “The Wall Street Way” to Retirement
Emotional stress of volatilityCLICK HERE for a chart showing the volatility of the Dow Jones. You’ll notice that the market typically moves in cycles, with the shortest “down cycle” lasting 17 years. Note that we are only 11 years into our current downturn.
Assume the responsibility of a pension manager – What if we have another 2008 and clients lose 30%, 40% or even 50% of their retirement savings? The popular Wall Street myth about earning a 10% average return if you buy and hold goes out the window if retirees are taking withdrawals and depending on their money for income.
(EMAIL ME for a free report by Mike Reese entitled “10% Market Lie.”)
• AARP recommends retirees’ withdrawal rates generally not exceed 4%. (CLICK HERE for the entire article.)
Guaranteed Income– There is no guarantee of income for life using “The Wall Street Way” to retirement, but according to AARP (http://www.aarpfinancial.com as of May 2, 2011 ), $1,000,000 may get clients roughly $40,000 for a period of 25 years.

3. “The Insurance Way” to Retirement
Utilize guaranteed income options – Annuities are the only vehicle which can guarantee income for the rest of a person’s life.
Eliminate the emotional stress of volatility – Retirees can lock in a payment they can depend on – no matter what happens to interest rates, the economy, etc.
Transfer the responsibility of pension management – Insurance companies have been managing pension style incomes for over a century.
Guarantee retirement income – Using an example of $1,000,000 and a guaranteed income distribution of 6%-8% annually, clients could be guaranteed an income of $60,000 to $80,000 – potentially 50% more income than the “Bank” or “Wall Street Way.”

In summary, when it comes to income for retirement, it’s pretty clear that leveraging insured retirement income solutions can rid retirees of the stress of the market by not only guaranteeing income for life but getting MORE income while they’re at it!

For a real life example, last week we prepared the casework for a client who was 62 years old and he wanted income at age 65 for the rest of his life. He had 500k in an IRA to fund it with. 
This client was able to get a guaranteed income of $38,318 for the rest of his life. NOT BY ANNUITIZATION OR GIVING UP ANY CONTROL OF HIS MONEY!

Have a great week!