Today, I walked into a coffee shop and saw a friend I hadn't seen for years. We sat down with our coffees and started "catching up." When he asked me what I did for a living, I told him that I sell annuities. "I help people create their own private pensions, their own' paychecks for life."
He almost spilled his coffee!
I reminded him that in today's economy when most people retire, they don't have a pension, what they have is a tax-deferred retirement savings account – an IRA, 401(k), 403(b) 457, TSP, or similar account.
I mentioned to him that our parents and grandparents typically retired with two annuities, Social Security (yes, it's an annuity – a guaranteed lifetime income annuity) and a pension (a pension is also an annuity that guarantees a lifetime income).
I reminded him that 10,000 Baby Boomers have been retiring every day since 2011 and will continue retiring until 2029. Many, if not most, are retiring from companies that no longer offer a traditional pension. These Baby Boomers are looking for ways to create their own "private pensions" to go with their Social Security annuities.
The problem for today's retirees is that the retirement accounts they contributed to when working typically don't offer a way to convert part of their retirement savings accounts into a guaranteed lifetime income.
And, along with helping my fellow Baby Boomers create their own personal, private pensions, I'm helping them to literally "insure and guarantee" the money in their retirement accounts against any losses when the stock market takes a dive or crashes.
Instead of placing their life savings into the stock market, where there are no guarantees of any kind, and the owner of the account assumes all the investment risk, my clients are placing part of their retirement savings into insurance contracts that provide a) contractual guarantees of no losses when the stock market declines, b) annual interest that's "locked-in" when the stock market has moved higher and c) as I mentioned above, a contractually guaranteed lifetime income.
I told him that, when I first meet someone, one of my first questions is this: "Is your retirement account doing "what you want it to do?"
When they ask me to explain, I show them the following table:
Retirement Account You Want Vs. Retirement Account You Have
You Want An Account That Does The Following: (Fixed/Fixed Index Annuity) Here’s What Your Account Actually Does:(Stock Market)
1. Retirement account is literally guaranteed to never lose money in the stock market. 1. Nothing is guaranteed – every dollar in the account can be lost.
2. Gains automatically “locked in” every year when the stock market rises. 2. No way to automatically lock in gains when the market rises.
3. No “management” fees – zero, zip! 3. Management fees whether account value goes up or down
4. Guaranteed lifetime income - monthly check that cannot be outlived. 4. No guaranteed lifetime income and a very real chance you could outlive your money.
Below is a summary of the table. The four significant differences between the "what you want" and "what you have" accounts:
- When retirement savings are placed into an annuity, the owner knows with 100% certainty that a) the money is never placed into the stock market where it can be lost, and b) the money is literally insured and guaranteed against any loss if the stock market declines or crashes.
Traditional retirement accounts provide no guarantees of principal protection.
- If retirement funds are placed into a Fixed Index Annuity (FIA), the account may receive an annual interest credit if the U.S. stock markets moved higher during the previous 12 months. The interest is credited to the retirement savings account automatically, and it can't be lost if the stock market declines in the future.
Traditional retirement accounts do not provide a way to automatically "lock-in" gains. Because of this, the accounts can lose value in subsequent months if the stock market declines.
- Fixed/Fixed Index Annuities do not have mandatory "management fees." They may have "surrender charges" and/or an optional fee for an "Income Rider," but they do not have any mandatory fees.
Traditional retirement accounts charge quarterly "management" fees, regardless of whether the account has increased or decreased in value during the previous three months.
- Fixed/Fixed Index Annuities can provide the owner with a guaranteed lifetime income. The income can start when specified by the owner, and the owner will receive a monthly check that cannot be outlived. Joint payouts can be set up so that a spouse continues to receive the monthly "private pension' paycheck until the spouse has passed on, with any remaining money in the account transferred, outside of probate, to designated beneficiaries.
Traditional retirement accounts do not provide a guaranteed lifetime income, and there's a very real chance the client could outlive their money.
My clients realized that "what they had" was not really "what they wanted" - they didn't want to risk losing part of their retirement savings in a stock market decline. Now they know, with 100% certainty, how much their "paycheck for life" will be, regardless of when they begin receiving their lifetime income.
My friend was amazed, he had never known that he could use insurance companies to literally "insure and guarantee" his retirement money, and those same companies could also provide him with a "private pension."
As we walked out of the coffee shop, he asked me to call him to set an appointment, and he wanted to find out more about retirement accounts that actually "do what you want."