Wade Pfau

Reverse Mortgages and Estate Planning

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Your home may be your most valuable asset and represent the largest portion of your estate. A reverse mortgage can help you hang onto that asset, by letting you tap into your accumulated home equity without having to sell the home. Still, the money you receive from the reverse mortgage will also have to be repaid after you die, reducing the value of your estate, possibly substantially. Here is what you need to know about reverse mortgages and estate planning.

KEY TAKEAWAYS

  • If you have a reverse mortgage on your home, it will have to be paid off after you die, reducing the home’s value to your heirs.
  • The rules are different for spouses who inherit homes with reverse mortgages than for other heirs.
  • A reverse mortgage could allow you to supplement your retirement income without drawing down other assets in your estate.

What Happens to Your Reverse Mortgage After You Die?

When you leave a home with a reverse mortgage to someone, you’re also leaving them with responsibility for the mortgage. What they’ll need to do next depends on their relationship to you.

If Your Heir Is Your Spouse

Spouses who inherit a home with a reverse mortgage fall into three groups. Which group your spouse is in will determine whether they have a right to stay in the home and possibly continue to receive benefits from the reverse mortgage.

  • Co-borrowing spouse – A co-borrowing spouse is listed as such on the original loan documents. Any co-borrower (they don’t have to be your spouse) can stay in the home and continue to receive money from the reverse mortgage.
  • Eligible non-borrowing spouse – Spouses who didn’t qualify to be co-borrowers (typically because they were under age 62 when the loan was issued) can be listed on the mortgage as eligible non-borrowing spouses. If they meet certain other requirements, they can also remain in the home, but they won’t receive additional money from the reverse mortgage.
  • Ineligible non-borrowing spouse – Such spouses don’t meet the requirements for one of the first two categories. They must buy the home themselves if they wish to remain in it. They can also sell it.1

In the case of co-borrowing or eligible non-borrowing spouses, the home and reverse mortgage become part of their estate when they die.

(Please note that this article describes the rules for Federal Housing Administration (FHA)–insured home equity conversion mortgages (HECMs) originated on or after Aug. 4, 2014; older HECMs have somewhat different rules. The Consumer Financial Protection Bureau provides both sets of rules on its website.)2

If Your Heir Is Someone Other Than Your Spouse

If you leave your home to your children or other heirs who are not your spouse, they will not be eligible to keep the reverse mortgage; instead, they must pay it off within a specified time frame. Essentially, they will have three choices:

  • Sell the home –After they pay off the mortgage, anyequity that remains is theirs to keep.
  • Buy the home –They can also pay off the reverse mortgage with their own funds if they want to keep the home.
  • Deed the home over to the lender – This way of settling the debt is known as a “deed in lieu of foreclosure.”3

Fortunately, no matter how much you owe on a HECM, your heirs won’t be stuck with a net debt. The most they’re obligated to pay is either the full loan balance or 95% of the home’s appraised value, whichever is less. The FHA insurance will cover any difference.4

Your heirs may have to take action fairly quickly. Technically, they have only 30 days from receiving a due and payable notice from the lender, although they can ask for an extension of up to a year to give them time to sell the home or arrange for financing to buy it themselves.5 Which course they are likely to follow will depend on a variety of factors, including how attached they are to the home and how much debt it carries.

One suggestion you may see online is to use some of the proceeds of the reverse mortgage to buy a life insurance policy made payable to your heirs. This could provide them with sufficient cash to purchase the home after your death. However, you may need all the money you receive from the reverse mortgage to cover your living expenses and not have any left over to buy life insurance, which can also be costly in your later years. Still, this could be an option for some people.

If You Have Other Assets

Reverse mortgages may be of greatest appeal to people who lack retirement accounts, nonretirement investment accounts, or adequate cash savings, making their home their only significant financial asset.

For example, if you know your heirs would like to inherit your home, drawing on those other assets for income could make more sense than running up a large balance on a reverse mortgage. On the other hand, if your heirs don’t have any particular attachment to the home, borrowing against it can be a way to preserve your other assets for them.

Wade Pfau, author of Reverse Mortgages: How to Use Reverse Mortgages to Secure Your Retirement,notes that having a reverse mortgage to draw on is one way to protect your other assets in a bear market. Rather than being forced to sell investments when prices are down to supplement your income, you can tap the reverse mortgage for income until prices rise again.6 Of course, you’ll pay a price for that flexibility in terms of the reverse mortgage’s steep up-front costs.7

A reverse mortgage might also help protect your other assets if you ever face major long-term care costs. Bear in mind, though, that the mortgage will have to be repaid if you move out of the home and into a care facility for 12 consecutive months or more, unless you have a co-borrowing or an eligible non-borrowing spouse living in it.8

How Much Can You Borrow With a Reverse Mortgage?

How much you can borrow with a reverse mortgage depends on your age (or the age of your co-borrowing or eligible non-borrowing spouse, if they’re younger than you), the equity you have in your home, and current interest rates. The current maximum for a government-insured HECM is $970,800.7

Where Can You Get a Reverse Mortgage?

To get a HECM (the most common type of reverse mortgage), you must go through a lender approved by the FHA. There is a search tool for locating lenders on the website of the FHA’s parent organization, the U.S. Department of Housing and Urban Development (HUD).9

At What Age Do Most People Get Reverse Mortgages?

While you’re eligible for a reverse mortgage at age 62, most people who get one wait until later. A Consumer Financial Protection Bureau study found that in 2019, the latest year for which data is available, the median age of reverse mortgage borrowers was 73.10

The Bottom Line

Your home may represent a significant part of your estate and having a reverse mortgage on it will affect how much of its value your heirs will receive when you die. If you have financial assets in addition to your home, supplementing your income with a reverse mortgage can help you preserve them for your estate. Because your heirs will generally be responsible for paying off the loan when you die, it’s worth discussing the situation with them well in advance.

Today’s Refinance Rates Are Better Than Ever

$400,000 for 1.93% APR for a 15-year fixed mortgage. These low rates won’t last forever. Experts agree rates will likely rise 30% over the course of this year. Skip this month’s payment if you refinance today. Calculate your new payment and see how much you could save with LendingTree.

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Ashley SaundersReverse Mortgages and Estate Planning
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TIPS and Annuities Good Bets When Inflation Is High with Wade Pfau

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Higher inflation means advisors need to be more efficient in positioning client assets for retirement, says Wade Pfau, professor of retirement income at the American College of Financial Services and a prolific author, his most recent book being the “Retirement Planning Guidebook.” He also writes the Retirement Research blog with Bob French and Alex Murguia.

In our ongoing VIP series, Pfau noted that using reserve funds was a good way for retirees to get through this higher inflationary period. Here are his responses to our series of questions.

Inflation has jumped 7.9% over the last 12 months. How would you counsel advisors to prepare clients for either pre- or post-retirement portfolios with this threat? What are the best options now?

Higher inflation requires being more efficient with positioning assets for retirement expenses. Rather than using traditional bonds, [Treasury inflation-protected securities] will help manage high inflation, and annuities with lifetime income can provide an extra kicker beyond the bond interest alone. A well-diversified investment portfolio, over time, provides opportunity to keep pace with inflation.

The Social Security COLA, which was raised to 5.9% this year, is now lagging current inflation rates. What is the best way for advisors to help retirees to counteract the crunch they are taking to their Social Security benefits (especially if they already are collecting benefits)?

Right, the COLAs only happen once a year and so start to lag inflation throughout the year. If some reserve funds are set aside for unanticipated expenses, higher than expected inflation could be a valid use for such funds.

What is your opinion on whether the COLA index should be changed from CPI-W to CPI-Elderly? 

I think this is a relatively minor issue and not a pressing need.

Do you believe that Congress will step up and make changes to Social Security, including making the appropriate funding, in the next couple years? Why or why not?

I don’t think we can expect Congress to act on Social Security until we get closer to the deadline when action will be needed, which is still not expected to happen until the early 2030s.

As Seen on ThinkAdvisor at https://www.thinkadvisor.com/2022/03/31/wade-pfau-tips-and-annuities-good-bets-when-inflation-is-high/

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The discussion is not meant to provide any legal, tax, or investment advice with respect to the purchase of an insurance product. A comprehensive evaluation of a consumer’s needs and financial situation should always occur in order to help determine if an insurance product may be appropriate for each unique situation.

Ashley SaundersTIPS and Annuities Good Bets When Inflation Is High with Wade Pfau
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The Two Biggest Risks for Investors and Retirement Savers

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There’s no shortage of risks that you’ll face in retirement, but two, in particular, are taking center stage at the moment: market risk and sequence-of-returns risk.

Markets are volatile, Wade Pfau, founder of Retirement Researcher and Professor of Retirement Income at The American College of Financial Services, writes in his most recent book, Retirement Planning Guidebook. And market volatility causes investment returns to vary over time. “Even with an average market return in mind, it is possible that markets could perform at a below-average rate for a prolonged period,” he writes.

And related to this, market volatility is further amplified by the growing impact of sequence-of-return risk in retirement. “This is the heightened vulnerability individuals face regarding the realized investment portfolio returns in the years around their retirement date—it adds to the uncertainty by making retirement outcomes more contingent on a shorter period of investment returns,” says Pfau, who also is the director of retirement research at McLean Asset Management.

Put another way: Sequence-of-returns risk is the risk that a retiree withdraws money for living expenses from retirement accounts that are falling in value. Imagine, for instance, a retiree with a $1 million portfolio who needs to withdraw $40,000 per year from that account. Now imagine that portfolio, after withdrawing $40,000, declines 16.6% in year one to $800,000, and then in year two, after withdrawing another $40,000, declines another 7.9% in year two to $700,000. That retiree is now looking at a nest egg that likely won’t fund their desired standard of living throughout retirement.

‘Worst Returns at the Worst Possible Moments’

“I would characterize sequence-of-returns risk as being the risk of the ‘worst returns occurring at the worst possible moments,’ says Andrew Clare, a professor of asset management at Bayes Business School City, University of London and co-author of Reducing sequence risk using trend following and the CAPE ratio.

And managing this risk is very difficult. “It requires careful risk management; transitioning to lower risk asset classes at these crucial times – such as the point of retirement – is the usual way of dealing with it,” says Clare. “However, the cost of this could be lower returns.”

In his book, Pfau highlights four general techniques for managing sequence risk in retirement.

Spend Conservatively

Even though retirees want to keep spending consistently on an inflation-adjusted basis throughout retirement, one option to manage sequence risk in retirement is to spend conservatively, according to Pfau.

In his book, Pfau writes:

“With a total-returns investment portfolio, an aggressive asset allocation provides the highest probability of success if the spending level is pushed beyond what bonds can safely support and annuities are not otherwise considered. The primary question with this strategy is how low spending must be to ensure a sufficient probability of success.

“Combining an aggressive investment portfolio with concerns of outliving your assets means spending must be conservative. Ultimately, fearful retirees may end up spending less with an aggressive investment strategy than they might have had they focused more on fixed-income assets. This aggressive portfolio/conservative spending strategy can be rather inefficient, as the safety-first school argues that there is no such thing as a safe spending rate from a volatile investment portfolio.”

The bottom line? This approach, which seeks to mitigate sequence-of-returns risk, can actually increase it, as there is no lever to provide relief after a market decline, according to Pfau. “The only solution is to sell more shares to keep spending consistent,” he wrote.

Maintain Spending Flexibility

Another approach keeps the aggressive investment portfolio of the “spend conservatively” strategy while allowing for flexible spending, says Pfau. “Sequence risk is mitigated here by reducing spending after a portfolio decline, thereby allowing more to remain in the portfolio to experience any subsequent market recovery,” he wrote.

This strategy, however, “results in volatile spending amounts, so most practical approaches to flexible retirement spending seek to balance the trade-offs between reduced sequence risk and increased spending volatility by partially linking them to portfolio performance,” Pfau writes.

Reduce Volatility (When it Matters Most)

A third approach to managing sequence-of-returns risk is to reduce portfolio volatility, at least when it matters the most. “A portfolio free of volatility does not create sequence-of-returns risk,” writes Pfau.

Essentially, however, individuals should not expect constant spending from a volatile portfolio. “Those who want upside (and, thus, accept volatility) should be flexible with their spending and should make adjustments,” he wrote.

So, what then are some ways to reduce volatility on the downside when the volatility could have the largest impact. According to Pfau, you could hold fixed-income assets to maturity or use income annuities.

Another approach, according to Pfau, is to use something called a rising equity glide path. With this approach, Pfau writes, you would start with an equity allocation that is even lower than typically recommended at the start of retirement, but then slowly increase the stock allocation over time. “This can reduce the probability and the magnitude of retirement failures,” he says. “This approach reduces vulnerability to early retirement stock market declines that cause the most harm to retirees.”

Jim Sandidge, a retirement researcher and author of Chaos and Retirement Income, also recommends this approach. “You manage market risk and sequence risk by using a conservative allocation early to minimize the frequency and magnitude of losses and gradually transition to more growth,” he says. “You can also manage it through cash flow allocation by skipping increases in the early years or in response to negative years.”

Avoid Selling at Losses

The fourth way to manage sequence risk is to have other assets available outside the financial portfolio to draw from after a market downturn. One could, for instance, “maintain a separate cash reserve, perhaps with two or three years of retirement expenses, separate from the rest of the investment portfolio,” Pfau says.

One could also use the cash value of permanent life insurance policies as a reserve and/or a line of credit with a reverse mortgage to serve as a reserve, writes Pfau.

Of note, in practice, more than a few advisers use not just one option when managing sequence of returns risk. They might, for instance, use what’s called bucket strategy, or time segmentation, or asset-liability matching. With this approach, the adviser puts two to three years of retirement expenses in cash, and then builds a bond ladder in which the bonds owned mature in the year the retiree needs the money for living expenses in years four to 10. And, then put the rest of a client’s portfolio in stocks and bonds for fund retirements expenses more than 10 years away.

Focus on Managing Negative Returns

To be fair, Sandidge says the emphasis on sequence risk obscures what retirees should focus on. “I would argue that sequence of returns risk is superfluous information or unnecessary jargon that will create mental dazzle and distract from the essence of the problem which is managing the effects of negative returns,” says Sandidge.

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The discussion is not meant to provide any legal, tax, or investment advice with respect to the purchase of an insurance product. A comprehensive evaluation of a consumer’s needs and financial situation should always occur in order to help determine if an insurance product may be appropriate for each unique situation.

Ashley SaundersThe Two Biggest Risks for Investors and Retirement Savers
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The Intuition for Reverse Mortgages

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The following is excerpted from chapter 1 of Wade Pfau’s newly revised book, Reverse Mortgages: How to Use Reverse Mortgages to Secure Your Retirement. It is available at Amazon and other leading retailers.

Understanding how reverse mortgages can add value in retirement planning requires an understanding about the peculiarities of sequence-of-return risk that the reverse mortgage can help to manage. When combined with a long retirement, sequence-of-return risk can lead to some potentially unanticipated outcomes regarding what types of strategies may work to support retirement sustainability. Sequence-of-return risk is a fascinating concept in that minor spending tweaks can have major implications for portfolio sustainability by impacting the amount of investment wealth that remains at the end of the planning horizon. This is the intuition I hope to help you develop in this section, as this will be key to recognizing why the later analysis of reverse mortgages in Chapters 5 to 8 works and is not “too good to be true.” ​

We proceed by examining these peculiarities using an example from the historical data that will serve as a baseline for comparing different reverse mortgage strategies later in the book. In the case study detailed further in Chapter 5, a 62-year-old recently retired couple is working to create a retirement plan that will support their budget for 34 years through age 95. We will consider a simplified version of that case study in which the couple has $1 million of investment assets in a Roth IRA and is seeking to spend $39,485 per year plus inflation throughout their retirement with a balanced investment portfolio of 60 percent stocks and 40 percent bonds. This spending goal is chosen because it will cause their investment assets to deplete fully after covering their spending at age 95, using the market returns from 1962 to 1995.

Because the risk that a market downturn pushes the current withdrawal rate from remaining investments to an unsustainable level, the first sequence-risk synergy to note is that small changes to the initial withdrawal rate can have a large impact on portfolio sustainability. This situation is illustrated in Exhibit 1.3. With an initial withdrawal rate of 3.95 percent, the portfolio is depleted in 1995. The exhibit also shows portfolio sustainability for small withdrawal rate changes: 3.55 percent (-0.4 percent less), 3.75 percent (-0.2 percent less), 4.15 percent (0.2 percent more), and 4.35 percent (0.4 percent more).

Read the full article, here: https://www.advisorperspectives.com/articles/2022/03/03/the-intuition-for-reverse-mortgages 

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The discussion is not meant to provide any legal, tax, or investment advice with respect to the purchase of an insurance product. A comprehensive evaluation of a consumer’s needs and financial situation should always occur in order to help determine if an insurance product may be appropriate for each unique situation.

Ashley SaundersThe Intuition for Reverse Mortgages
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Retirement Expert Wade Pfau Discusses Dividend Stocks, Long-Term Care, and More

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by Christine Watkins

Courtesy Wade Pfau

Economist Wade Pfau’s views on funding retirement, subject of a recent Barron’s article, spurred a lot of comments from readers, including those who believed Pfau erred by not touting the virtues of stocks or real estate investment trusts that have histories of paying high dividends.

Pfau is dubious. Owning stocks that pay a high dividend doesn’t provide the same secure retirement income as owning safe bonds “because dividends can be cut,” he says. 

He adds that if retirees are willing to own a broad market index and live off the dividends, that’s a “pretty conservative” strategy. The problem is that the

S&P 500
stock index yields only around 1.4% currently, and retirees with a dividend-income strategy typically gravitate to stocks with higher payouts.

“As soon as you move away from a diversified market portfolio, you’re taking on more risk,” says Pfau, a professor of retirement income at the American College of Financial Services.

Pfau believes that seniors can’t count on continued gains in the stock market to fund their retirement. He has recommended that they consider products like variable annuities, whole life insurance, and reverse mortgages that will hold their value even if stocks take a dive.

On Delaying Social Security

Other readers took issue with Pfau’s assertion that retirees should consider spending down their portfolio to delay Social Security and receive a higher benefit. One reader said he was starting Social Security at age 62 so he won’t have to tap his 401(k) and will reap the benefits of stock-market returns until his required minimum distributions begin at 72.

Pfau says this approach overlooks that stock-market returns aren’t guaranteed, and that delaying Social Security provides a guaranteed boost in benefits.

Pfau agrees that retirees will come out ahead if they claim Social Security early, they invest the money, and the stock market rises briskly. “Obviously if you get 10% returns [in the market], you’re better off claiming early,” he says. “It’s just, what is the reality of that happening over an eight-year period?”

Other readers said they wanted to claim Social Security early because the federal pension is underfunded and benefit cuts are likely.

Pfau has calculated even if benefits are cut 21% the year you turn 70, you’re likely still better off delaying benefits. Such a benefits cut would delay the break-even age to 83 instead of 80 for someone who waits until age 70 to claim, he says.

On Roth IRA Conversions

Pfau told Barron’s he recently built a model to determine when it is best to convert money from tax-deferred accounts to tax-free Roth IRA accounts. That spurred one reader to ask: What did Pfau’s model find?

“There is no one answer,” Pfau said in a follow-up interview. “It depends completely on each personal situation. On how much you have in your tax-deferred account. On how much you have in your Roth. What are your spending goals? When are you claiming Social Security?”

In a Roth conversion, investors pay taxes on money moved from their tax-deferred account to their Roth account. The conversions generally make sense when their current tax bracket is lower than their future tax bracket.

The question readers should be asking themselves, according to Pfau: “Is there a chance of prepaying some taxes and avoiding higher taxes later on?”

On Long-Term-Care Insurance

Pfau expressed skepticism about traditional long-term-care insurance in the Barron’s Q&A. But he said that newer hybrid products that combined long-term-care insurance with life insurance or an annuity had potential.

One reader wanted more explanation. Pfau has run calculations on long-term-care insurance, and he says the traditional policy he examined barely pays off even if you use it for the maximum benefit. And if you don’t need long-term care, all the money you paid in premiums is gone.

By contrast, combining long-term-care insurance with life insurance means that it is no longer use it or lose it, Pfau says. “Even if you don’t need long-term-care insurance, you have the death benefit,” he says.

Pfau has done consulting for insurers, and his work is sometimes cited by the industry. One reader complained that “smooth-talking yet pushy insurance sales guys” had used Pfau’s research in a sales pitch for annuities.

Replies Pfau: “I wish people weren’t using my research in any way. I do put in a caveat that I’m talking about competitively priced annuities. And there are some noncompetitively priced annuities that pay higher commissions” to salespeople.

 

Read the full article: https://sportsgrindentertainment.com/retirement-expert-wade-pfau-discusses-dividend-stocks-long-term-care-and-more/

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The discussion is not meant to provide any legal, tax, or investment advice with respect to the purchase of an insurance product. A comprehensive evaluation of a consumer’s needs and financial situation should always occur in order to help determine if an insurance product may be appropriate for each unique situation.

Ashley SaundersRetirement Expert Wade Pfau Discusses Dividend Stocks, Long-Term Care, and More
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A lasting stock market downturn can be a big problem early in your retirement

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Economist Wade Pfau has been thinking about retirement since he was in 20s. But not just his own retirement.

Pfau started studying Social Security for his dissertation while getting his Ph.D. at Princeton University in the early 2000s. At the time, Republicans wanted to divert part of the Social Security payroll tax into a 401(k)-style savings plan. Pfau concluded it might supply sufficient retirement income for retirees—but only if markets cooperated.

Today, Pfau is a professor of retirement income at the American College of Financial Services, a private college that trains financial professionals. His most recent book, “Retirement Planning Guidebook,” was published in September.

While many retirees are banking on a continuing rise in stocks to keep their portfolios growing, Pfau worries that markets will plunge and imperil this “overly optimistic” approach. He has embraced oft-criticized insurance products like variable annuities and whole-life insurance that will hold their value even if stocks crash, and he has done consulting work for insurers. He wrote another book, “Reverse Mortgages: How to Use Reverse Mortgages to Secure Your Retirement,” because these loans also can be used as “buffer assets” during market meltdowns.

Read More: https://www.barrons.com/articles/retirement-4-percent-rule-downturn-strategy-51642806039 

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Ashley SaundersA lasting stock market downturn can be a big problem early in your retirement
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Swap Your 401(k) and start receiving a Lifelong Monthly Check

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by Mara Rev Resma, The East County Gazette

Annuities may be growing to your 401(k). The previous month, Fidelity Investments turned out its Guaranteed Income Direct program, an opportunity that can change portion or all of your retirement profits into a stream of expected monthly wages for life — all without moving your 401(k) record.

Specialists state it is an emerging bias, and retirement savers can anticipate viewing more plan providers giving related opportunities, which combine an outstanding revenue element to your program.

“The problem with 401(k) programs is that they were created for retirement assets, but most businesses just happened to invest plans,” states Wade Pfau, co-leader of the Retirement Income Center at The American College of Financial Services. 

“Therefore, it’s excellent to view they presently are frequently having annuity rights or different sorts of plans to achieve a retirement plan.”

Assured Income Direct enables workers that apply the plan management company’s assistance to choose critical income annuities from insurers of their selection. Members likewise gain admittance to Fidelity’s digital tools and retirement benefits institutional sources. 

Approximately 8 million operators in the U.S. have their 401(k) by Fidelity, but their employer should take the annuity opportunity for it to be open to them.

With inflation controlling the headlines, several people similar to retirement worry they may survive their profits. Here’s how an annuity can assist.

How many 401(k) programs allow annuities?

In January 2020, just 10% of employers gave annuities as their 401(k) program members. 

However, according to Fidelity, higher than 78% of operators are involved in setting some of their retirement proceeds into a finance choice that supports monthly revenue.

One of the causes why employers have been reluctant to give annuities is a risk. Sixty percent of workers stated they didn’t allow annuities out of concern that they’d be taken professionally responsible if the insurance business is giving the annuities covered under, according to a 2020 investigation by the advantages advising and insurance firm Willis Towers Watson. 

Still, the SECURE Act of 2020 raised some of the responsibilities on workers, and experts forecast that more 401(k)s would quickly involve an annuity opportunity has come to move.

Read the full article, here: https://theeastcountygazette.com/swap-your-401k-and-start-receiving-a-lifelong-monthly-check/

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The discussion is not meant to provide any legal, tax, or investment advice with respect to the purchase of an insurance product. A comprehensive evaluation of a consumer’s needs and financial situation should always occur in order to help determine if an insurance product may be appropriate for each unique situation.

Ashley SaundersSwap Your 401(k) and start receiving a Lifelong Monthly Check
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Episode 117: Matching Your Practice Model To Your Client’s Psychology with Wade Pfau and Alex Murguia

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Last week, we explored the psychology of building a retirement solution for a client that not only delivers results, but also adapts to the personality traits of your client. This week, in part 2 of our discussion, Dr. Wade Pfau and Dr. Alex Murguia explore how advisors and firms should change their engagement strategy and even their service offerings to meet the exact needs of each client.

Also, do you want to get regular updates on news about Wade, Alex and other guests of our show? Go to https://thatannuityshow.com and subscribe to our newsletter. We hope you enjoy the show.

Links mentioned in this episode:

The Retirement Income Advisor Challenge on October 25 and 26 will allow advisors to learn more about what the RISA is, to take it, and to learn how they can incorporate it into their firms: http://risaprofile.com/challenge

Wade’s new book is the Retirement Planning Challenge. The RISA is discussed in Chapter 1:
https://www.amazon.com/Retirement-Planning-Guidebook-Navigating-Important/dp/194564009X/

General website for the RISA:
www.risaprofile.com/

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 Listen

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The discussion is not meant to provide any legal, tax, or investment advice with respect to the purchase of an insurance product. A comprehensive evaluation of a consumer’s needs and financial situation should always occur in order to help determine if an insurance product may be appropriate for each unique situation.

Ashley SaundersEpisode 117: Matching Your Practice Model To Your Client’s Psychology with Wade Pfau and Alex Murguia
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Episode 116: Finding Retirement Solutions That Stick with Wade Pfau and Alex Murguia

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What makes a retirement recommendation not only work but also stick for your clients?  Could it be a combination of personality traits and beliefs about the market? We were really fortunate this week to have Dr. Wade Pfau and Dr. Alex Murguia on to discuss their research on the topic. They walk us through the tool they have built to help decode what exactly makes our clients tick.

Also, do you want to get regular updates on news about Wade, Alex and other guests of our show? Go to https://thatannuityshow.com and subscribe to our newsletter. We hope you enjoy the show.

Links mentioned in this episode:

The Retirement Income Advisor Challenge on October 25 and 26 will allow advisors to learn more about what the RISA is, to take it, and to learn how they can incorporate it into their firms: http://risaprofile.com/challenge

Wade’s new book is the Retirement Planning Challenge. The RISA is discussed in Chapter 1:
https://www.amazon.com/Retirement-Planning-Guidebook-Navigating-Important/dp/194564009X/

General website for the RISA:
www.risaprofile.com/

 Watch

 Listen

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Show Sponsors

The discussion is not meant to provide any legal, tax, or investment advice with respect to the purchase of an insurance product. A comprehensive evaluation of a consumer’s needs and financial situation should always occur in order to help determine if an insurance product may be appropriate for each unique situation.

EPISODE TRANSCRIPT:

Paul Tyler:

What makes a retirement recommendation not only work, but also stick for your client? Could it be a combination of personality traits and beliefs about the market? We were really fortunate this week to have Dr. Wade Pfau and Alex Murguia on to discuss their research on the topic. They walk us through the tool they built to help to decode what exactly makes our clients tick. Also, do you want to get regular updates on news about Wade, Alex and other guests of our show? Go to thatannuityshow.com and subscribe to our newsletter. We hope you enjoy our show.

Ramsey Smith:

Today’s show is sponsored by our friends at The Index Standard. As many of you who listen to our show certainly know fixed index annuities and RILAs are getting more complex and technical just when fiduciary rules are getting stricter. So how do you choose the right indexes and allocations? You should consider The Index Standard. They’re an independent provider of ratings and forecasts on all indices and ETFs used in the US insurance space. Their process is designed to be systematic and unbiased with the goal of identifying robust and well-designed indices. We all know finance is complex. The Index Standard has a clear rating system and uses approachable language to demystify this complexity. Visit theindexstandard.com for more information.

Paul Tyler:

Finally, we want to thank our primary sponsor and my employer [inaudible 00:01:34] NASSAU financial group. Our tagline is working harder to be your carrier of choice. We support you with best in class service. We seek to keep things simple and we’ll have your back in the years to come. We’re headquartered in Hartford, Connecticut with 27 billion in assets and over a half a million policy holders. We’ve been doing this a long time, 170 years, but we remain humble enough to always try to improve.

Intro:

Welcome to That Annuity Show, the podcast that will make you an expert in explaining annuities to your clients. Give us 30 minutes each week and we’ll shave hours from your client presentations. Now here’s your host, Paul Tyler.

Paul Tyler:

Hi, this is Paul Tyler. And welcome to another episode of That Annuity Show. Ramsey Smith, how are you today?

Ramsey Smith:

Fantastic. Always glad to be here.

Paul Tyler:

Yeah and we’re we’re missing our other two co-hosts, Mark Fitzgerald and Will [inaudible 00:02:42]. They had other commitments, unfortunately, that prevented them from joining, but I know they were actually really looking forward to the discussion we had. By the way, Ramsey Smith, I actually, last night you can’t believe what I did. I actually went to a concert.

Ramsey Smith:

No kidding.

Paul Tyler:

A Sheryl Crow concert.

Ramsey Smith:

Nice.

Paul Tyler:

We have a local theater, that’s pretty well known in Westchester. She was there. We purchased, can’t make this one up tickets two years ago.

Ramsey Smith:

Wow.

Paul Tyler:

We finally showed up. What a different experience. So, go in, show our proof of vaccination, Yes, I am vaccinated. Everybody please get vaccinated if you haven’t. And we wore mask. It wasn’t like a totally packed place, but yeah, it was interesting. Why am I telling you this is because it actually did connect with her show. I mean, Sheryl Crow, I mean, she was great. She’s 59 and [crosstalk 00:03:39] doing this, right? Like, does this change our perception of what age is? And I was listening to one of her songs and I’m thinking, okay, I got to talk about this safe and sound. Okay. I don’t want to be lonely. I don’t want to be scared. And all our friends are waiting there until you’re safe and sound. And you think about our business. That’s what we do. We make people feel safe and sound, especially when they get that age. It’s a bracket. So I don’t know. Ramsey Smith, do you want to set this up? Am I safe and sound in retirement? Can you tee up our desks for our guests?

Ramsey Smith:

Well, one way to get on the right track is make sure that you’re learning from the right people. And we’re very lucky to be rejoined today by, by Wade Pfau, who has become a lion in the retirement industry and Alex Murguia. They work together at Retirement Researcher. Among many other things, they wear a lot of hats. Wade is a fellow Princetonian like you and me, Paul. So we’re always, always glad to have tigers on.

Paul Tyler:

Yeah, look, yeah, go tigers.

Ramsey Smith:

There you go. And you know, Wade has been a prolific writer. His most recent book is the Retirement Planning Guidebook, but what we’re here to talk about mostly today, or at least for this first segment, is to talk about a new platform that Wade and Alex have developed called RISA. And we’re very excited to talk about it because it deals with, very importantly deals with a lot of behavioral elements of the investment process. So with that, Wade, I’m going to turn it over to you. Tell us a little bit more about yourself, whatever I missed. Tell us about RISA. Tell us how about how you and Alex got together and then we can meet Alex too.

Wade Pfau:

Yeah, absolutely. Thanks Ramsey Smith. And so I do, as you noted, wear a lot of hats. My, one of my primary day job would be the RICP Program Director at The American College, where we have a three-course designation on the different aspects of retirement and complaining. And that really just speaks to in general, the research I’ve been doing. I basically write computer programs to test different retirement strategies and that really along the way, and with The American College as well, needing to be agnostic and starting to recognize there’s a lot of different retirement strategies.

Wade Pfau:

I’ve also been working with Alex. Now, I think it’s been about nine years on different functions and things and with McLean Asset Management, the RIA firm we work at and then Retirement Researcher. And now with the RISA that we’re going to be talking about today, it has been a great opportunity and really glad to be here today to talk about that and Alex, if you have an introduction for yourself

Alex Murguia:

Well, hello. Well, thank you for that, Wade. No, actually, just as Wade said, we’ve been working for a number of years. Every time you say that Wade, I’m getting to the age where I can say, “Wow, I’ve been here for X number of years.” I guess I’m officially on the other side of that hill to a large extent, but now Wade and I have had a great working relationship for about a decade now. And it was through his writings that again, he alluded to it earlier, I’m a Managing Principal of McLean Asset Management that I reached out to Wade. I think he was still in Japan. And just started a conversation with him and something that [inaudible 00:06:59] bear is saying Ramsey Smith had noted it and Paul as well. He’s a lion in the industry, but Wade is also one of the most unassuming, nicest folks you’ll ever meet.

Alex Murguia:

I mean, my honor is just to be able to call him a friend. He’s just an amazing, amazing person. And with that, we you hang on to people like that, that’s the reality. And we joined McLean Asset Management and we’ve been running ever since. And you know, we’re intellectually curious. And when we see something that there’s a little [inaudible 00:07:29] in the literature, in the profession, we start trying to fill it. And this is something that we’ve been doing within McLean, where we’ve taken that agnostic approach. I mean, we were frankly, the traditional AUM advisory firm. And now we’ve amplified beyond that simply because we feel that you need to provide the entire purview of services for a client. I mean, not doing so we thought was a gap and we needed to address it, but we also created Retirement Researcher from that, and that spawned from Wade’s writings in Japan, and that was the start of his block, but we realized, “Wow, Wade, we’ve got like X thousand number of readers and we’ve gone all into that to make that, in our view, this preeminent educational site for retirement research” and that’s done wonders.

Alex Murguia:

And we used that frankly, to segue into the conversation. We used that to start an investigation into retirement income beliefs. And so, at heart, I think I’m a tinkerer. I’ve done that through businesses. I mean, [inaudible 00:08:35] fancy, I’d say scientist-practitioner, but the reality is, we like to tinker with ideas and see how far we can push it. And this is one of the ideas that we seem to have a lot of runway.

Ramsey Smith:

So, you know, when I think about the body of work that you’ve already created, it’s sort of amazing that right here, right now, you’ve come up with something, something new. So very interested to hear about how you came up with a project, I mean, you sort of alluded too a bit Alex, but most importantly, what is it that RISA is doing that’s different than what you’ve done before and you know what you’re seeing your peers if you will doing. What is the main crux of what you think this is bringing that’s new and different?

Alex Murguia:

Wade, just because people came to hear you probably me. Why don’t I start with the methodology because then I can get that, that part out of the way, like what started it and then I’ll hand it off to you in terms of the concepts and so forth. Makes sense?

Ramsey Smith:

Sure.

Alex Murguia:

All right. I have just started really to answer the question. It depends. On Retirement Researcher, we were getting asked, our inbox would be full every day with somebody asking, “Hey, should I do this? Should I do that? Hey, should I have this allocation? or “Hey, should I buy this annuity?” or “Hey, should I do this with a bond letter?” And these are just straight up emails that we were receiving and you can’t answer that. You just can’t answer that without knowing the context. And ultimately our answers were always, “It depends.” And that wasn’t satisfying for us and I’m sure it wasn’t satisfying for the person receiving it, but we can’t, from a professional standpoint, we can’t do any, anything more than that.

Alex Murguia:

And so Wade and I were like, “Wait, what, what do you think that it depends really is?” As opposed to having it depends what can we get at is to find out what it really depends on? If you can do this or that?, and that started the study, figuring out what it depends. And we ended up at, we took Wade’s. He has a retirement income optimization map, where it’s okay, this is the sort of the map, if you will, for how to source retirement income. And we looked at it and we wanted to see. There’s nothing right or wrong here. It’s really about preferences. Which path you wanted to go on this map? And that’s the underlying assumption for everything that we’re going to say and talk about, which is, listen, we don’t think there’s this winner.

Alex Murguia:

There are many credible ways to get your retirement income done correctly. I think the person that says “This is the best way,” I think they have to check their assumptions. I think ultimately there are many ways to have a credible retirement income plan in the same way, there’s many ways to earn a living. There’s not one right way or wrong way. It’s just, it really has to do with your preference. So we started asking ourselves, “What are those preferences?” And we scoured the literature and we sort of compiled them into themes. And from there we have a very healthy membership, but at that point, it was probably 20,000 plus. And Wade and I wrote down 800 questions on things that it could depend on and we gave it to our readership.

Ramsey Smith:

Can I ask a question, 800?

Alex Murguia:

Yeah.

Ramsey Smith:

[crosstalk 00:11:53] Is that literally 800? Are you, is this somehow appropriately or did you literally create 800?

Alex Murguia:

I think it was 836, to be honest, something like that.

Ramsey Smith:

Okay.

Alex Murguia:

Because we were like, okay, let’s see what it [crosstalk 00:12:04] Right. No, no, there’s not that many now, but we just wanted to throw everything out there. What does it defend? We’re very thorough, Ramsey Smith. And from that we gave it, but to give you a sense of our readership, right? We actually were telling them what we’re doing. We just said, “Listen, we want you to just rate these questions and let us know if they’re good or not. Don’t answer them. Just let us know if they make sense.”

Alex Murguia:

And it took like probably two hours for them to look through, you do a SurveyMonkey, you send them out, you say, rate them, let us know, that kind of thing. And it came back and then we ranked them and then we reduced it to something like 330, something like that. So we’re not [inaudible 00:12:44] we reduced it to 330. And that was the start of the RISA. Yeah that was the start of the RISA and that was the start of me trying to go back to school for grammar, because I got so much feedback on my syntax on these questions that it just destroyed me personally. But from there we started the study, we gave it out and it came back and wait, I’ll hand it off to you in terms of what we started to find.

Wade Pfau:

Yeah. And I mean, this has really been a work in progress in terms of, as Alex was saying back about 10 years ago and I was still living in Japan, getting into retirement planning. I just started to recognize that you can ask someone a basic question and get a completely opposite answer on all these different fundamental issues like that. Do stocks become less risky over longer holding periods? Some people vehemently argue, “Yes.” Some people argue, “No.” Is there such a thing as a safe withdrawal rate from a volatile investment portfolio? Some people say, “Sure, you can look at US historical data and get your answer.” Other people say, “No, there’s really no such thing as that. And so that line of thinking, I started to who kind of classify, we have this probability-based approach, which is more of a total returns effort of thinking about. It’s like the 4% rule of thumb for retirement.

Wade Pfau:

You have a portfolio of 50% to 75% stocks. You invest in the total returns basis and you take distributions. And then on the other side, I called it safety first, where you’re looking more at “No, let’s build a floor for a core retirement expenses, essential versus discretionary, and then invest for the upside beyond that”. And that just kept going. I mean, we’ve had the Financial Planning Association talks about systematic withdrawals, which is the kind of what we call total returns, time segmentation, which is that bucketing approach, where I try to invest in bonds for the short-term stocks for the long-term, and then essential versus discretionary, which is the flooring idea that we talk about in the context of income protection or Risk-Wrap.

Wade Pfau:

And that’s kind of now leading to where we are today, where we know there are different retirement styles, but there was really never anything to assess, which is appropriate for which person. If I’m somebody approaching retirement, am I comfortable investing in a 60-40 portfolio and taking distributions from that and relying on market growth? Or am I somebody who would prefer to have contractual protections?

Wade Pfau:

And so as Alex was saying about the 800 questions into 300 questions, and then now into where we’re at today, we recognize there are six factors that can help to identify someone’s style that they’re, they express distinct characteristics people have. And then of those six, two of them are, are particularly important. They help us to really start to outline people’s styles in terms of how they approach the retirement decision. One of those, we gave the name of the probability-based safety first. It’s I’m comfortable relying on market growth, or I prefer to have some sort of contractual protection. And then the other big factor was like commitment or optionality.

Wade Pfau:

I want to commit to a strategy and feel like I can check that off my to-do list and, and have something that I know is going to work for my plan, or I really just want to keep my options open as much as possible. [crosstalk 00:16:03].

Wade Pfau:

And then as we start looking at that, we see, well, these retirement strategies that we’ve known about, they really start to make sense in the context of different combinations of these preferences. And then you can also build up this story with the, I said, there are six total factors. So the four secondary factors help to tell that story as well, but you can see how the existing retirement strategies we have really fit into that kind of dynamic and framework.

Paul Tyler:

This is fascinating. I mean, Alex, to your point questions, oftentimes I find are more powerful in the answers. You know, answers are usually easy to find. Did you ask the right question in the first place? So wait, as you look through the results, did you kind of look through and say, “Wow, our model matches some of these other more famous personality models, like the [inaudible 00:16:56]

Alex Murguia:

[crosstalk 00:17:01]

Paul Tyler:

Yeah. The disk. Yeah, the ocean. Was there anything you found that sort of said, “Ah, this, this kind of matches this personality test and I put this together and this explains it.”

Alex Murguia:

You had a gentleman on the show a few weeks ago that talked about the Big Five and things along those lines. What we did with this and my background is a Doctorate in Clinical Psychology. I was more a researcher than a practitioner. And I did quite a bit of Psychometrics from that standpoint. And what I always prefer is to just ask directly how they feel about a certain subject. I like to be very localized as opposed to not that it’s wrong or right, but you’re an extrovert, so you’re high on [inaudible 00:17:48] will equate to a 30% fund allocation. I’m not a big fan of that. From that standpoint, we prefer to be a lot more localized with what we’re asking. So the questions that we asked were not that general. And frankly, we did ask quite a number of psychological variable questions such as numeracy, Dunning-Kruger, which is self-awareness. We created our financial bias scale, self-efficacy with regards to retirement income, but that’s another sort of realm if you will, from that standpoint.

Alex Murguia:

So the long answer is no, we didn’t find those kind of connections, but because we didn’t really source for them, but we were able to find preferences that were quite strong and were more trait like, from that standpoint as opposed to states.

Wade Pfau:

Yeah. And where this fits in as well. So we’ve had like the risk tolerance questionnaire idea, but that was really always an accumulation tool. It’s we know, I mean, Harry Markowitz, who developed modern portfolio theory and it kind of recognizes, it was never designed for the household problem. It was really how do I seek a risk-adjusted return if I’m only investing, I don’t take distributions from the portfolio and there’s not really a sense of, and I have a finite, but unknown retirement that I’m trying to take those distributions over. And so the risk tolerance questionnaire, it was not designed at all for retirement, but it was the only tool out there. And it really presupposes. Everyone wants a total return investing strategy and there was nothing else out there about. Well, no first, I mean, we’re not saying there’s no role for risk tolerance questionnaires, but first, what’s your style?

Wade Pfau:

How do you want us source retirement income? And then at some point, most of the retirement strategies will include an investment component and you need the risk tolerance questionnaire for that component, but that’s not the starting point. You first need something broader to recognize how does somebody want to source a retirement income strategy? Do they like what resonates with them? The story behind total returns, the story behind bucketing, the story behind having safe, reliable, protected, lifetime income through the annuity. You really want to get a sense of that as a starting point to have that conversation. And then the rest will be able to be built up from there.

 

Speaker:

Yeah [inaudible 00:20:07] to follow up on that, that question as well, apart the way we look at, it’s not so much from the Big Five personality, but more like a strength finders, if you will, that help you sort of begin to think about what role within your employment you may thrive in. I may be butchering that, but yet something along those lines.

Alex Murguia:

Well, we’re trying, we’re playing with that concept with regards to retirement income. How do you want to earn retirement income? And there’s four strategies. And so these factors, probability, safety, first, optionality commitment. Really that was our aha moment. We initially wanted to just quantify retirement income beliefs. We wanted to have the right to say, there is such a thing as probability-based, there is such a thing as safety first, we can quantify that and there may be some safety first cops here, and we concede nothing is completely safe, from that standpoint.

Alex Murguia:

But our view is contractual obligations are more certain if you will, on a relative basis than the probability of some asset will go up, so you can take a sustainable withdrawal. I just want to get that one out of the way. But by being able to really capture these preferences, our aha moment was, wow. These actually lead to strategies. These strategies that are out there make sense. And we didn’t envision that at the beginning, but it just like slapped us in the face, while we were going through it. Wouldn’t you just say Wade, when we were like, I remember that meeting, we were speaking to each other and we were like, “Wait, take a look at this. Can you believe this?”

Wade Pfau:

Yeah, I think it’s probably worth walking through that of just that, that process we went through with how these factors identify strategies and also how some of our strategies are more behavioral in nature that were developed to meet certain preferences that might fall outside the natural realm of like correlated preferences.

Ramsey Smith:

Let’s do it. You tee it up, let’s go.

Wade Pfau:

Yeah. Yeah. I mean, so there is a correlation. If you like to have a lot of optionality, you also tend to be more probability-based, which is you’re more comfortable relying on market growth. So you do have this first category, the optionality and probability-based, that’s a total return investing strategy. That’s having that diversified investment portfolio and taking distributions and investing from a total returns basis is with secondary factors. There’s also an element of you have more of an accumulation mindset where you’re focused on portfolio growth, more so than predictable income. You have more of a technical liquidity mindset and you’re more of a front loader. You prefer to like, get your spending done early in retirement when you know, you’re still healthy. And that’s one of the core strategies.

Wade Pfau:

Then the other core strategy from that, we call income protection. And that’s these elements of your safety first. So you desire are these contractual protections more so than relying on market growth. You’re more comfortable committing to a strategy with the secondary characteristics. You have more of a distribution mindset. So you’re thinking more in terms of having predictable income over just having like the highest possible growth for your portfolio. You’d like to have a perpetual income floor. You think more in terms of true liquidity, which is just even though a brokerage account may be liquid, if you’ve already earmarked it for some other use, you can’t really say it’s truly liquid for your financial plan.

Wade Pfau:

And then also you have more of a backloading preference. Like you have more longevity risk aversion. You’re worried about outliving your assets. And, therefore, you want to put more effort into ensuring that if I’m 90 years old, I still have some money left.

Wade Pfau:

And that’s the flooring income protection, more the world of either like a SPIA or a DIA or a fixed index annuity with a principal protection and a living benefit attached to it. And those are the two core strategies.

Wade Pfau:

And then the other two strategies are more this like behavioral idea, like bucketing, time segmentation. That was always a play on, on the behavioral aspect of people kind of thinking if they can leave their stocks alone for a few years, because they have bonds to fund their short term expenses, they’ll be okay.

Wade Pfau:

Well, that corresponds to people who want contractual protections, but they also want optionality. And those two ideas don’t always coalesce. I mean, if you want a lot of optionality, it’s hard to sign a contract. But time segmentation really was a behavioral strategy developed to help meet those desires, those conflicting desires. And you do that again with you make the contractual protection, not with lifetime income, but with just a short-term, holding individual bonds to maturity covering the upcoming expenses-

Speaker:

Could also be a [inaudible 00:24:35]

Wade Pfau:

…letting your stocks ride. Yeah. I mean with annuities as well. You’re probably not thinking there in terms of lifetime income, but a fixed index annuity as an accumulation tool, [inaudible 00:24:45], those can play an important role in that sort of strategy as well.

Wade Pfau:

And then the other behavioral kind of strategy is, is Risk-Wrap. And that’s you want to rely on market growth. You also want to commit to a strategy. You also there do have more of this back-loading preference, you have more longevity, risk aversion, so forth. And that’s the whole world of differed annuities with living benefits. You can still have upside potential, especially with like a RILA, with the variable annuity that allows for a more aggressive asset allocation as you want it, even in some cases within an FIA, but this is probably more focused on, you’re going to be willing to accept some downside risk to get more upside potential.

Wade Pfau:

Because you do have more comfort relying on market growth. You are more probability-based, but you are more also want to commit to a strategy. You have the back loading. Your longevity risk-averse. You don’t want to outlive your assets. So you want that lifetime income protection. And that’s exactly really the story of deferred annuities with living benefits and how they’ve developed, especially since the 1990s to meet these kinds of conflicting type characteristics that people have.

Wade Pfau:

And so these preferences and that we identified is just like where Alex and I were saying it. It’s really amazing how well they align with existing retirement strategies and how we can then tell that story. And that’s then helping to better place people and the type of approach that’s going to resonate with them. Or at least it’s going to be the starting point for the conversation. They might disagree. And for whatever reason say they want to do something different, but at least you’ve got a great starting point for a conversation about here’s what your results show. This may be, how you best prefer to source your retirement income. Let’s look at it this way.

Speaker:

Wade, just because you’re on a role, you may want to consider too the whole concept of everyone gets a seat at the table and just the frequency distributions of this. How is this representative across a normal population?

Wade Pfau:

So right now we’re working with the Alliance for Lifetime Income. They’re doing a national survey. So we can talk about this from the perspective of the US population soon. Right now, our perspective is the 1500 readers at the Retirement Researcher, who are not necessarily a random sample of the US population. But what we were seeing was approximately about a third of the population is total returns. And that’s important to just reflect upon for a moment because really the whole so much of consumer media and the way retirement planning is pitched to the general population. It’s very much focused on total returns and that kind of approach really only fits about a third of the population. And then about a third of the population is income protection and that’s more of the, like the full annuity type story, you’re really more committed to possibly annuitizing the contract and getting the lifetime income that way.

Wade Pfau:

And then about a sixth of the population is more of a time segmentation bucketing approach. And about a sixth of the population will have more of a preference for, what we call the Risk-Wrap, which is getting that lifetime income through the deferred annuity with a living benefit.

Ramsey Smith:

So this is fascinating and it’s fascinating because we talk so much about out the importance of financial education and I’m sure all of us in our conversations with whether with advisors or with consumers, we sort of, empty our coffers of all the years of experience we have between the four of us. I’m sure we like we give people everything we have because we want the best for people, right?

Speaker:

That’s what this podcast we’re doing right now.

Ramsey Smith:

Right. Exactly. But, but what’s often strikes me is you’ll have a conversation with somebody. You’ll give them the absolute best most objective advice you can think of. And then you find out later what they did and you’ll find the thing, sometimes they do nothing. Sometimes they do everything. Sometimes they just take some part of what you advised. And ultimately it’s not really a conflict of intellect, right? It’s a conflict of style, right? [crosstalk 00:29:00] And so that’s sort of, what’s interesting about this finding is like the most important thing to figure out is before you do anything in is like, well, what style of person am I talking to so that we can have a conversation that’s likely to yield to some action.

Alex Murguia:

I think that’s a 100% percent [crosstalk 00:29:15] I think quickly what happens. I think what we’ve gotten used to, I think advisors tend to be more engineer like, and optimizing for the highest balance sheet number at the end of life, kind of, but the reality is-

Ramsey Smith:

And the highest AUM in the interim.

Alex Murguia:

…yeah, yeah, yeah. You said it. I mean, but there’s this optimization and the reality is, is there’s two sides to that coin. The advisors are obviously a human being. They have their own profile. They have their own preference. And so they when somebody walks through that door, are they optimizing for the preference that they want? Remember the underlying assumption for the entire argument is there are many ways to get this, right?. Okay. So when someone walks through your door, are you just, and, and this goes for, if you just sell annuities and nothing else as well. But [crosstalk 00:30:04] Are you just telling the story that optimizes for your own profile business model suck for your own profile or are you taking the time to just empathize with the client and figuring out how does that person want to optimize retirement income? Let me open up my toolbox and now provide the right solution set. That’s there it is. That would be my comment to your comment.

Alex Murguia:

In addition to empowering the individual, to let them know that, “Hey, you don’t just because you walk through the door of somebody doesn’t mean that whatever they tell you is, is the way to go. There are many ways to do this correctly. You have your certain style, figure that out, and then you can begin the process of analyzing.”

Ramsey Smith:

What they’re telling you is good or bad, right? Again, it comes back to this sort of style conflicts. So you bring up this very interesting notion of like it sounds like you’re focusing on determining the style of clients, but I wonder if it makes sense to also determine the style of advisors as well.

Alex Murguia:

There is absolutely, we’ve given, as word has gotten out, we’ve gotten a lot of inbound.

Ramsey Smith:

Yeah.

Alex Murguia:

And so I’ve noticed folks that want to take this, we, we demo it. And so we give it to people. So folks that come from the insurance side, the annuity side of the business, guess what quadrant they’re at. Folks that come from the investment side of the business that are professionals, guess what quadrant they’re at? [crosstalk 00:31:27] You’re absolutely right. Now you could say, is that because of, or do these people naturally, gravitate towards these industries because that’s their own personal proclivity. As an aside, I’m income protection and Wade is more in the Risk-Wrap. And so I don’t think lesser of him. No, I’m kidding. But you know, it’s fine.

Wade Pfau:

Yeah. I mean, each strategy has a story and it’s really which story do you resonate best and find most compelling. And yeah I do. when I’m presenting this to advisors, I say it’s important to understand your own style as a starting point, and then understand whether, I mean, when we do get pushback on this thus far, it is from people who do believe there is just one superior retirement strategy and that all the others are garbage. And so trying to say, someone should try something else is inappropriate to even talk about that. [crosstalk 00:32:21] But I’ve seen that from total returns people. I’ve seen that also from like time segmentation people. Haven’t seen it a lot yet from the annuity world, but no, that’s we’re starting from the point. I mean, I have my personal preferences, like Alex said. I resonate better with the Risk-Wrap story with the deferred annuity, with the upside potential, but still having the living benefit.

Wade Pfau:

I don’t resonate with the time segmentation story. I don’t think that if I had five years of bonds to cover me that my stocks are going to be perfectly okay with a five-year holding period before I have to tap into them. But I still think it’s a viable strategy. And if that’s what someone resonates with, I’m comfortable talking about it as a viable strategy. So advisors need to think about if you really want to serve one strategy, that’s fine. And then you can kind of use this to identify who’s the most appropriate people for you to be talking to, or like the approach, we have taken and [inaudible 00:33:16] let’s try to be more holistic and be able to serve all the different styles so that we can meet people where they are and give them the right strategy.

Ramsey Smith:

Paul, you’re on mute.

Paul Tyler:

Sorry. Yeah. A little bit of work going on the other, other side of the house here. So this is really interesting. So we’re going to have, we’ve got kind of uncovered two tracks. One track is Paul has his identical twin, same age, you know, same assets, different personalities. Wade and Alex, what I’m hearing is, it may be much more easier for each of us to have a very different structured retirement portfolio for our personalities to actually embrace and adopt. Wade am I right in, in stating that?

Wade Pfau:

Absolutely. And before that conversation was more, maybe you should be 70% stocks and your brother should be 30% stocks.

Paul Tyler:

Yes.

Wade Pfau:

But this is, no, it goes a lot further than that.

Paul Tyler:

Yeah. So Ramsey Smith, we could almost do a separate conversation here and talk down the track you’re headed with the advisor. Does that make you know?

Ramsey Smith:

Sure. Sure. We can make this a two-parter. We can go the chapter two.

Paul Tyler:

Why don’t we do this? I mean, Alex, you want to just so far our listeners, we got you here. We’ve got a lot of great content. I want to make that when people get to wherever they’re going, they’re listening to stuff. They know that they can, there’s got something else next week to listen to. Alex, [inaudible 00:34:49] it up? So you did a little bit, but like what did your findings really focus on in terms of like the advisor selection?

Alex Murguia:

Sure. There was another part of this where I think Ramsey Smith had asked me, does this resonate like with the, is this similar? Does it echo a DISC or does it echo Big Five personality traits and things along those lines.

Alex Murguia:

As part of the study, in addition to retirement income beliefs and something just cause I got to get in there. With regards to the RISA, not only did identify styles, it was actually predictive of annuities. If you were income protection and along those lines, there was a significantly high probability that you had that strategy. So there was a lot of validation going on in that as well. But as part of the study, sorry about that segue. As part of the study, we also included a lot of psychological variables and we noticed, and again, I’m a big fan of being very localized when we ask a question.

Alex Murguia:

So instead of just general self-efficacy, I want to know about retirement income self-efficacy for that standpoint or instead of overconfidence, I want to know specifically about this particular subject matter. And so we included in there because I think you have to control for these factors when you do these types of analysis. And we also control for age, gender, marital status, net worth, and the RISA factors were significant controlling for all of that. And we did compare it with loss aversion. Loss aversion just trailed away, pretty quickly, but we included a lot of psychological variables. And so we created scales around that, created them, validated them, etcetera, etcetera. And we did, we created a retirement income self-efficacy scale and what we were getting at there and different from like general confidence. Confidence is more generalized across many items.

Alex Murguia:

If you will, I’m a confident guy. I can do anything. Self-efficacy is a concept that’s a little more localized with regards to what you’re measuring. I’m confident, but you know, when it comes to self-efficacy for home repairs, forget it. I’m just not there from that standpoint. So we created a scale around retirement income self-efficacy. How well do you think you can overcome the challenges that you will see with regards to retirement income? So we’ve created a scale around that. We created an advisor utility scale, an advisor usefulness scale, which is how useful is an advisor from a cost effective standpoint. Sure everyone can say, look, an advisor will help you [inaudible 00:37:21] advisors, et cetera, et cetera, et cetera. We wanted to just put it out there. “Hey, how useful do you feel an advisor is relative to the cost?”

Alex Murguia:

I don’t know about you folks, but you know, anyone that walks through McLean and we’re talking, if they really don’t believe an advisor is useful, you can show any Morningstar study you want of advisor [inaudible 00:37:39] and all of that. I’m not persuasive enough to convince anyone differently. So I just want to know where they’re coming from. I think that’s a better angle, at least from our standpoint.

Alex Murguia:

So advisor usefulness, advisor self-efficacy as a side note, we created a financial bias scale. We took a bunch of heuristics and actually we thought we were going to get a lot of different biases, but they just seemed all closer together within the financial, within the factor analysis view. So there really was a big like financial heuristic scale we created, numeracy, how well they are with the [inaudible 00:38:11] concepts, a concept known as Dunning-Kruger, which is, you don’t know what you don’t know kind of vibe. Where you ask from the numeracy, how well you think you did. So we took that and we measured inertia. Once you know that you have to deal with an issue, how quickly do you turn that around?

Paul Tyler:

So, sorry. [crosstalk 00:38:30] go ahead. Yeah, let’s cut. Ramsey Smith makes sense to cut here. I think, but we’ve flooded appetite to listen next week’s episode. Does this make sense? [crosstalk 00:38:40] All right. And so I’m going to, we’re going to leave you hanging. Okay. This is our cliffhanger. Okay. So stay tuned. Same podcast channel, same annuity station.

Paul Tyler:

Exactly. And we’ll be right back and we’ll continue this discussion. And I can’t wait to hear the next session. So thanks and thanks for joining us and tune in next week. Thanks a lot. Alex, Wade, thanks so much. And we’ll continue from here.

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Ashley SaundersEpisode 116: Finding Retirement Solutions That Stick with Wade Pfau and Alex Murguia
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Episode 44: Scrap The 4% Rule – Wade Pfau Says To Use 2.2%

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Wade Pfau, the founder of Retirement Researcher and the Professor of Retirement Income at The American College of Financial Services, joins us today. We discuss the problems with using a 4% as a safe rule for withdrawal planning in retirement. We also explore why annuities work better than bonds in creating higher levels of predictable income in retirement.

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The discussion is not meant to provide any legal, tax, or investment advice with respect to the purchase of an insurance product. A comprehensive evaluation of a consumer’s needs and financial situation should always occur in order to help determine if an insurance product may be appropriate for each unique situation.

Nicholas BreniaEpisode 44: Scrap The 4% Rule – Wade Pfau Says To Use 2.2%
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