Suppose that everything you know about planning is wrong, incorrect, not helpful to customers and, indeed, upside down. What then?
4% income for life
There are at least two ways to deal with this popular idea. The first says that, when you retire, if 4% is taken from your pile of cash each year, you and a spouse will probably have enough money to survive for the two required lifetimes. The second way is built on the first and modifies the 4% idea by adding the inflation rate. You take 4% for the first year of retirement, then 4% times 1.03 (where 0.03 is the headline rate of inflation) for the second year, and 4% times 1.0x for the third year, and so forth. Chances are this will work, too. This idea is illustrated via
Basu's AgeBander and
So, you may do better designing for a customer to have more income in the beginning of retirement. It's upside down from the usual inflation-driven argument.
And don't just think about 10 years. Your customer may have a different timeframe entirely. Really turn things around and look at them backwards, forwards and even upside down.
Don't use variable annuities for IRAs
This was a popular cause of the
Clearly, if you have a required minimum distribution-friendly investment annuity, one that says, for example, that it will pay 5% for life, you have Nirvana. Why? Because it will pay 5% for the rest of your life and your spouse's life, but, if the required minimum distribution (RMD) amount is greater, it will pay that amount. (The 5%, or whatever percent, is typically an annually guaranteed amount set by a guaranteed withdrawal benefit built from the higher of market value or a minimum growth rate.) Once the contract runs out of "real" money, it will still pay a percentage of the income benefit, set years ago, and the need to follow RMD rules will cease. So what? Receiving good income, based on previous deposits and growth, makes one wonder: who cares that the "real" money is gone? What could be better than income forever?
And what about death benefits inside investment annuities? Some of them are quite creative and give a survivor options. He or she may continue income, take in cash or even reload the contract with the death benefit, whichever is best. Ohio National, for example, will permit two reloads, and so it is possible, if two spouses die in order before age 94, that beneficiaries will get the deposit amount or income benefit base again.
So, annuities can be an IRA's best friend, right? It's another upside-down situation.
Indexes are the way to invest
Had you bought the
Clearly, the S&P and the Dow were not anything to write home about for the last 10 years. On the other hand, a well-managed mutual fund would beat the heck out of the S&P or the Dow. (American Funds has a number of them. James Balanced:
This does not mean that Bogle is wrong. It just means that good managers for the last 10 years beat the heck out of flat-lined indices. Lots of bad managers had very poor results.
There's a case to be made for active management of investments, too — kind of a tactical when-to-get-in and when-to-get-out approach. Since good fund management may — and did, over the past 10 years — beat indexes, there is a still case for buy and hold. (A cursory look at
Tactical vs. index and buy-and-hold investing
The tactical approach was covered last year in my column devoted to The Sherman Sheet. If you are interested in the hows, whys and wherefores of tactical, please check out www.theshermansheet.com or phone
There's nothing wrong with the 4% paradigm, buy-and-hold, index investing, tactical or anything else, is there? But it's helpful, each time you visit with a new customer or review an old customer's plan, to turn things upside down and measure each possibility to find the best way for the customer. If your customer needs 8% income for 10 years and then 3% for the rest of his or her life, giving him or her 4% from the get-go is kind of off the mark, isn't it? So, every day, think straight, okay? And then, for a while, turn everything upside down and think about it hard. Give the exercise some time. See if parts of the plan might look better upside down.
T his information is intended for financial professionals only, not the general public. This is not a solicitation to buy or sell any specific security.
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