Why are older adults working longer?

By Sam Deleo
Tucker Advisors Senior Content Specialist/Editor

We are about to experience a major transformation of our labor force in the United States. Is it the change we want?

Forty years ago, the federal government lengthened Social Security’s full retirement age (FRA) from 65 to 67, and increased the delayed retirement credit. This incentivized people to work longer and, in fact, the U.S. Bureau of Labor’s statistics show this is exactly what many Americans began to do.

Since 1983, employment rates for men aged 65-69 have risen by 10%, and by 15% for women in the same age group. By next year, 2024, one in four workers will be 55 or older, which is an over 100% increase from 30 years ago in 1994.

But the Bureau of Labor data shows that something else has also occurred over the last four decades: People lost their pensions (defined benefit plans) and were forced into defined contribution plans, usually in the form of 401(k)s. Since 1980 through 2014, workers with retirement plans that included a pension fell from 39% to 13%, a 200% decline. Conversely, workers who only have 401(k)s or defined contribution plans, rose from 9 to 34%. The Bureau of Labor has coined this loss of pensions as a “negative wealth effect” that has caused workers to be “increasingly motivated to work past the FRA.”

Some of us tend to leave these statistics out of the discussion when pointing to increased longevity and health, or even boredom, as reasons that older adults are working longer. And yet, it’s true that there can be many advantages to working past traditional retirement ages that contribute to a better quality of life, as well as more robust financial portfolios.

Older, not lesser

While ageism may unfortunately be the last-standing, socially tolerable form of discrimination, older workers are shattering its stereotypes. Senior employees tend to promote positive “can-do” attitudes in the workplace. The American Association of Retired Persons (AARP) reported that workers over 55 performed with the highest levels of positive engagement in the workplace. Their survey also showed that younger employees viewed their older colleagues as teachers of on-the-job skills. In a study from 2021, the Department of Labor found that older workers could save employers money on re-training costs because they tended to remain more loyal to remaining with the company than younger workers.

Those who decide to work past the traditional retirement age of 65 can help deter the development of dementia, avoid feelings of isolation if they are widowed or alone, and consistently maintain an active lifestyle. A study in the Journal of Epidemiology & Community Health found that working even just one year past 65 can increase one’s lifespan by 11%.

“A huge part of our self-worth is attached to work,” said Bryce Gill, an economist with the investment firm First Trust. “So it’s not surprising some people want to continue working if they can.” Gill points out that the bigger factor may be that the nature of work has changed over the last century to allow people to consider the option to extending their employment: “It’s no longer the case that a majority of people are performing physical labor, which made it impossible for older adults to work many of those jobs in their later years.”

“I think that the research now bears out that people’s health outcomes and longevity both increase when they work longer,” said Bridget Sullivan Mermel, CFP®, CPA, host of “The Chicago Money Show” and the YouTube channel, “Friends Talk Financial Planning.” “From a health standpoint, it keeps you active, but it also gives you a sense of purpose. So, when discussing older adults working longer, the ideal scenario is a job in the last 10 years of their working careers that is not too stressful or taxing physically.”

In terms of personal finances, those who decide to work longer experience nearly exponentially compounded gains. Not only are they able to allow their savings to accrue more interest for a longer period of time before drawing from them, but they can often shift into a lower tax bracket and supplement their financial portfolios. 

“Every year you work longer, you’re giving yourself more options,” said Sullivan Mermel, “you’re getting away from poverty-level income in retirement.” But it’s important that people optimize the money they earn. Paying off credit cards is not a sound reason to delay retirement. In one manifestation or another, people should be contributing to their savings. “You can both pay off debt and save,” said Sullivan Mermel, “but never do away with the latter in favor of the former, or in hopes you’ll begin saving sometime in the future. If you’re going to work longer, you have to get out of this paycheck-to-paycheck thinking habit. Otherwise, you may just be perpetuating an endless cycle and never be able to stop working.”

Why not retire?

The sheer scale of people working past 65 warrants a closer look into the reasons why. Referenced in a 2022 study by Voya Cares, the Bureau of Labor predicts the trend of older adults working longer to keep accelerating. About one of every three people (32%) between the ages of 65 to 74 is expected to be to be working in 2030, as opposed with 27% in 2020 and 19% in 2000. For those 75 and older, the bureau projects 12 percent to be working in 2030, compared with only 5 percent in 2000 and 9 percent in 2020. But the study also dug a bit deeper than other surveys on this topic:

Statistics may show that older Americans are working longer. But, as working past FRA transitions into more of the norm in America, people also appear to be losing hope in the possibility of reaching retirement, in choosing not to work. Recent studies by YouGov.com echo the responses in the Voya Cares report:

These figures do not cancel the positives of working longer. But they do place them in a different context.

“In general, when it comes to finance and economics,  we tend to discuss everything as choice or options,” said Tanja Hester, author of “Work Optional: Retire Early the Non-Penny-Pinching Way.” “That is not always the case for a large number of people. The amount often cited for what people have saved for retirement is slightly above $140,000. But that number is an average—the median would be lower, and the modal would be much, much lower. The largest number of Americans have zero saved for retirement.”

Have we become a nation living paycheck to paycheck?

CNBC recently cited a survey by Vanguard titled, “How America Saves 2022,” which supports Hester’s comments. According to the study, people have saved an average of $141,542 for retirement, but the median account balance was only $35,345, which means half of the accounts were above this number and half were below. This median figure provides a bit truer picture by canceling the outliers that can distort the average amount.

As a consumer society, we have never placed an emphasis on saving money. But wages have also not kept up with inflation and the cost of living over the last several decades. From 1979 to 2018, wages rose five times less than productivity. The current inflation rate of 6% has only made saving more difficult.

“You need to be responsible,” said Gill. “On the other hand, we know that 80 percent of stocks are owned by wealthier people. How do we change that so people can choose not to keep working if that’s what they would like to do?”

recapturing choice

Besides inherited wealth, stock ownership has traditionally been a central means to accumulating revenue in the U.S. Far too many people have overlooked it as an alternative because they either felt they did not have enough money to invest or could not seem to consistently budget money for the purpose of investing. Defined contribution plans like 401(k)s have helped to offer people some exposure in the market, where they can generate savings.

“My first job out of college in my early 20s, I remember maxing out my 401(k),” said Gill. “And the number of people at my job who were contributing nothing, even to the matching amount—which is free money—must have been in the majority, which was absolutely shocking to me.”

If workers still have available income to dedicate after investing in their defined contribution plans, they can consider stocks, but only with a full understanding of the risk. “You should have a bare minimum of $10,000 to $20,000 in mutual or indexed funds before even considering looking at an individual stock,” said Gill. “I’m a financial analyst, but even I am not going to succeed with individual stocks more than about one third of the time. Investing is not sexy. I recommend sticking with index funds and avoiding individual stocks. The easiest and most productive habit can be to set up a regular contribution schedule to something like a Vanguard Index fund.”

Money matters are emotional because they permeate our personal relationships. This is why they demand our careful attention, and delaying them in favor of a more convenient time in the future to deal with them is often a vicious cycle for many of us. We owe it to ourselves to act as preventively with our money as we do with our health issues.

“When my husband and I met and merged our accounts, our first paycheck would go to rent and our second paycheck automatically got deposited into our investment accounts,” said Hester. “The biggest difference-maker for me involves creating automated plans. We all have limited willpower, and we all have limited means of using it every day. So, to expect people to put aside money on a regular basis is asking a lot. If you have a workplace retirement account, automatic contributions help. Also, escalator options exist for these contributions when people get raises or COLA increases. But, if you don’t have those savings options, you can still split your bank accounts and have some of your paychecks automatically deposit into your savings account. I started with $50 in my savings account when I was in my 20s. It doesn’t sound like a lot, and it isn’t. But it added up. So, find banks that allow paycheck splits.”

The reason automation can be so critical to saving for retirement involves human nature—it’s easier not to plan than it is to plan. If we have scheduled automatic contributions to our retirement savings, we can choose a number of budget adjustments to make up for that missing money. However, if we rely on finding the money each month among our other expenses, without an automated plan, we’re less likely to make the contributions.

Some financial planners have suggested that an automatic opt-in to a retirement contribution plan like a 401(k) should be the default when employees are hired, giving them the choice to opt out if they choose to, rather than vice versa, as these plans are set up now. This could allow people to get used to budget adjustments from the very start of their new job and wages.

“Automatic opt-in is one way of trying to avoid underfunded retirement savings, because we don’t always think in our best interests,” said Sullivan Mermel. “As for opt-in savings plans, if we’re going to do it, I want it to be a healthy percentage, I want people to have money in these accounts. Let’s not bother with just 3%, because then, what’s the point?”

Sullivan Mermel recommends that auto deductions be a topic of conversation for financial advisors with their prospects and clients. “Try to figure out what might be interesting to them—if it’s stocks, great, that’s fine,” she said. “You’re still encouraging them to take that money out of their paycheck-to-paycheck cycle of expenses.”  

Reversing the trend in deficit retirement savings can, and often should, involve people seeking out professional financial planning advice. Most financial advisors offer free consultations and can at least offer people the broad details of a financial plan. But many older adults have never taken advantage of this opportunity. Consequently, they budget their money without a financial plan to direct their savings actions.

In order to enjoy the maximum benefits of meeting with a financial planner, timing is key. Waiting until 63 to plan for a retirement at 65 is not a sound strategy. The earlier people meet with financial advisors, the more the advisors can do to mitigate savings deficits.

“I want to meet with someone five years minimum before they want to retire,” said Sullivan Mermel, “so I can implement tax strategies alongside investment strategies and have them both work in unison.”

As one of the founding figures in the “financial independence, retire early” (F.I.R.E.) movement, Hester mentioned some less conventional ways people can prepare for retirement, such as health care subsidies in states that have expanded Medicaid. “These are called ‘advanced premium tax credits,’ “ said Hester, “and they are means-tested and based on income, not assets. If your health insurance could basically become free, that eliminates a huge expense for people.”

For those who live in mid-range to high-cost areas, moving to a low-cost state can sometimes add to their savings, Hester said. But it’s critical to thoroughly research all the costs involved, some of which may not be obvious, such as housing codes, property taxes, state taxes, etc. Some retirement experts even advise visiting a proposed change of location at different seasons of the year to better gauge expenses.

“It’s important to have the traditional diversified portfolio plan,” said Hester. “But also include contingency accounts, like a high-yield savings instrument, an income property that you can rent as long as you are able to and then sell in retirement if necessary, or an inheritance, even small, placed in a growth account. Mortgage payoffs also can work this way to generate retirement money.”

Everyone has their own unique set of financial circumstances, and so they will have slightly different solutions to their paths to retirement. Many financial advisors, for instance, might recommend rolling over 401(k)s to Roth IRAs as a savings strategy, but Hester said even that common practice deserves scrutiny. “Research the cost basis for traditional IRAs, because dividends and capital gains are taxed at a lower rate, so it may be better, unless you’re wealthy, to keep a traditional IRA. Tax avoidance at all costs is not right for everyone.”

what future do we want for ourselves?

Can we celebrate a sense of purpose in the jobs we work as older adults? Is it healthier to age working or playing? Do we want to spend our later years more with our co-workers or our grandchildren?

The world of work is changing rapidly around us in ways that people could not have foreseen 40 years ago. These changes deliver a range of advantages and disadvantages to older workers, as well as new challenges. How will we decide to meet these challenges?

When it comes to Social Security, for instance, there are those who favor a path to privatization and those who would rather expand the public program that already exists. Referenced by CBS News, a Congressional Budget Office (CBO) study last December showed that doing away with Social Security’s $160,200 tax cap in favor of eliminating the cap for earnings over $250,000 would fund the program through 2046.

If 65 is no longer a reasonable age to retire, what age is? Some members of Congress have rightly pointed out that most Americans are living longer than they were decades ago and can safely work until 70. The CBO’s study found that raising full retirement age to 70, however, would effectively cut benefits for today’s current workers, costing them each an average of $65,000 in payments.

Perhaps there are no absolutes when it comes to private or public solutions for our retirement deficits. People need to act more responsibly in converting their earnings into savings. And we as a society may have to consider options like revising our defined contribution plans, which may require greater responsibility from employers or new legislation from Congress.

“People need to have a financial plan at least 10 years out from the time they want to retire, if not longer,” said Sullivan Mermel. “Maybe a default contribution or some other revision to 401(k)s is the lesser of two evils when compared to dramatically increasing Social Security or administering some other bailout for older adults, which everyone ends up having to pay for in the end.”

None of our options will be easy, and no consensus of opinion will ever likely be reached. But if we want to keep alive our choice to retire, we can no longer wait to act.

How Retirees Can Outpace Inflation

By Sam Deleo
Tucker Advisors Senior Content Specialist/Editor

As October drew to a close, our national rate of inflation rose to a whopping 5.4%. The Federal Reserve also announced they would not raise interest rates, but would gradually begin decreasing the bond-buying program they had enacted in order keep credit rates low. While the market remains strong, how does this news affect the savings of retirees or those about to retire? 

One major consequence is that many retirees, who in the past have relied on bonds as secure instruments, may need to rethink this strategy. As Brett Arends wrote in MarketWatch on October 26th, “Last week the U.S. bond market’s prediction of U.S. inflation for the next five years leapt to 2.91% a year—the highest figure this millennium. That tops the inflation fears that surged in 2008, just before the financial crisis, and a previous peak in early 2005, when the housing market was out of control.” 

Many retirees remember the double-digit inflation of the 1970s, along with fuel rationing and long lines at the gas pumps. Arends points out how today’s inflation is much lower, but also much different in context. 

“Back in the 1960s and 1970s, bonds paid high rates of interest. So even though consumer prices were rising by 4% or 5% or 6% for most of the decade, the interest rate on bonds was still higher. So you had a cushion,” Arends writes. “In 1973, when inflation surged to 6.2%, 10-year U.S. Treasury bonds were paying 6.6% and BAA investment grade corporate bonds about 8%… In 1978, when inflation hit 7.6%, Treasuries were paying north of 8% and BAA corporates north of 9%. Bondholders still (eventually) got hurt: Soaring inflation caused bond prices to tumble. And at the peaks, in 1974-75 and 1979-80, the inflation rate overtook their interest rates. But overall the bonds helped compensate them for higher prices. Not today.” 

As of October 26th, the interest on a 10-year government bond was posting around 1.62%, while 30-year bonds hovered around 2%. So, bondholders stand to lose money even if interest and inflation rates don’t rise, and they stand to lose substantially if the latter continues to rise or remain at a high level. Additionally, CD and money market rates are well below 1%, and the average interest for a savings account in the U.S. now tops out around .06%. 

A story in the New York Times last week pointed out that the bond market’s expectations for inflation over the next five years had reached a new high of just over 3%. But whether 2.91%, as Arends wrote, or just over 3%, it’s not great news, and it contradicts the messaging that has been coming from the Federal Reserve about plus-2% inflation lasting only a year or two at most.   

So, how do people who are retired or about to retire combat this inflation? How can they ensure that their savings don’t lose money? Let’s look at a few of the more common options people choose for their portfolios. 

Download Your Free

FIAs Outperform Bonds Guide

1. All Equities

Equities should be a part of any portfolio, and some people go so far as fill their portfolios exclusively with equities. In a largely bull market like the one we’ve seen over the last 18 months or so, an all-equities strategy would have greatly exceeded the rate of inflation. For people 10 or more years away from their retirement, this strategy could work very well, provided they have the time and expertise to study stock options every day and/or can rely on a financial advisor to help them with their choices. In the worst-case scenario of a market crash, these individuals would still have time for the years a portfolio recovery would necessitate. But for someone retired or nearing retirement, this strategy could be fatal to their portfolio. 

Market crashes can take five years or more for people’s financial portfolios to be made whole again. If people looking to retire or already retired are relying exclusively on equities for income, a crash, or even a steep correction, could effectively either end or greatly delay their retirements. In all likelihood, they would need to continue working for many more years or reenter the work force they left. An all-equities approach is much too aggressive to safely fund a retirement, and it carries risks that could be devastating to a retiree’s portfolio.

2. Stocks and Bonds Blend

A stocks and bonds mix is one of the most common strategies people choose for their financial portfolios, and many of us have traditionally believed in it as an approach that strikes a healthy balance between risk and security. But maybe we haven’t been accurate in that belief. 

Economist Roger Ibbotson and his team at Zebra Capital Management ran hypothetical return simulations from the years 1927 to 2016, which included both rising and falling yields. Their research showed that, net of fees, fixed indexed annuities had an annualized return of 5.81%, compared to 5.32% for long-term government bonds. The return for large-cap stocks over that period was 9.92%, again proving that an all-equities portfolio is a strong choice for those not yet retired or preparing to enter retirement. 

Ibbotson’s study also showed that during below-median bond return periods from 1927 to 2016, a 60/40 stocks and bonds portfolio returned 7.6%, on average. For a 60/20/20 stocks, bonds, and fixed indexed annuities portfolio, the return for that same time was 8.12%. And, a 60/40 stocks and fixed indexed annuities portfolio produced 8.63%. Individually during the below-median periods, fixed indexed annuities (FIAs) produced a 4.42% return, while bonds returned only 1.87%.  

In above-median bond return periods, FIAs reduced returns, with long-term government bonds returning 9% and FIAs only 7.55%. Ibbotson explained that, in falling yield environments, a large portion of the bond return is capital gains, enabling them to outperform FIAs. 

“I’m not necessarily advocating you go all in,” Ibbotson said about FIAs in the paper. “I think combinations of stocks and bonds and fixed indexed annuities are good.”

3. All Annuities

But what if someone did go “all in” on fixed indexed annuities in a portfolio, as Ibbotson mentioned. How would that play out against inflation? Not very well, actually. 

Even strategically chosen annuities—and let’s be clear, annuities should not be purchased any other way—will likely not be able to hedge against a sustained inflation rate of say, 5% or thereabouts. An annuity that pays someone $800 per month in 2025 will still only be paying $800 a month in 2035 or later. Also, the interest offered by annuities does not compound in the same way as the rate of inflation. If the participation rate of an annuity is 87%, for instance, and the interest is at 4%, it is easy to conclude that the purchasing power of this money would actually decrease in years of high inflation, much in the same way annuities cannot capture all of the gains in a high-growth market. 

There are inflation-adjusted annuities, known as Treasury Inflation-Protected Securities (TIPS), but the rate of return reported on Oct. 21, 2021, for a five-year TIPS was -1.685%, a record low. This means a policy holder is earning 1.685% below the inflation rate, or, according to TIPSwatch.com, investors are paying about $109.51 for $100.14 of value.

4. Annuities and Stocks

The stock market is not going to outpace inflation every single year. But as an average, it has definitely beat inflation throughout the history of the market. 

As Ibbotson pointed out, during a below-median bond market period like the one we find ourselves in, a 60/40 stocks and fixed indexed annuities portfolio produced an 8.63% return over the near 90-year period of his study. In this blend, the annuity portion of the portfolio is not expected to compete with inflation, because it can’t, and that’s not what it is designed to do, anyways. The equities take care of that, as an average over time, while the annuities anchor future income for retirement. 

Those retirees who still feel inclined to add stocks to their portfolio can do so, but they should read Ibbotson’s study first. His research shows that there is no historical market evidence to choose bonds over annuities for the “safe money” portion of one’s portfolio—especially in high-inflation environments like the present.  

“Because of issues like inflation, longevity, and income insecurity, to name just a few, the first step for any person preparing for retirement is to meet with a financial planner who specializes in retirement planning,” said Tucker Financial President Darren Petty. “This way, people can better identify the assets they need to take risks with in order to outpace inflation. Many folks are being forced out of low-risk investments now, and it’s been happening for a long time, actually. So, people move from fixed income, like bonds, into equities. Make your income-producing assets produce income and let your growth assets grow. That’s the foundation of any retirement plan: Identify the portion of your portfolio that needs to pay you in retirement, and therefore, isn’t exposed to catastrophic losses. And then, place the remainder of the portfolio in equities.”

“Especially given the fear of inflation, it’s easy for us to fall into the myth that all of our income always has to be increasing,” said Petty. “But that is usually not the best way to secure income for the future. Also, it ignores the fact that some annuities are paying 5.5% to 6% in interest.”

The No. 1 way for retirees to worry less about inflation is to get their asset allocation right. A balanced retirement portfolio should have growth assets and income-producing assets.

How those asset allotments figure into a sound retirement plan is different for everyone. But, with the help of a retirement planner, it’s the key to a portfolio unlocking the threat of high inflation.

Notes

For more information about retirement strategies to outpace inflation, email Jason.Demers@TuckerAdvisors.com or Kyle.Savner@TuckerAdvisors.com. 

Sources: 

1. MarketWatch 
2. The New York Times 
3. “Fixed Indexed Annuities: Consider the Alternative,” Ibbotson. 
4. TIPSwatch.com 

– For Financial Professional Use Only. Insurance-only agents are not licensed to offer investment advice.

Are Insurance Companies Safe?

By Sam Deleo
Tucker Advisors Senior Content Specialist/Editor

They have been called the debt managers of the world. But just how solvent and safe are insurance companies?

Shortly after The Great Recession began unraveling in 2008, many people feared insurance companies would suffer the same fate as investment banks like Lehman Brothers, Bear Sterns, Wachovia and Washington Mutual. After all, no one could have predicted those banks would fail, either. Apart from those old enough to remember The Great Depression, people had never experienced such a far-reaching financial downturn.

As Time Magazine pointed out with a story in October of that year, insurance companies operate differently than banks. For one, they are tightly regulated and they are regularly audited. The National Association of Insurance Commissioners assists state insurance regulators in, according to the agency’s website, protecting consumers and ensuring “fair, competitive, and healthy insurance markets.” The agency began in 1871, and for the last 150 years, has assisted the public interest by providing oversight of the insurance industry.

Regulations require insurance companies to contribute to state funds that protect policy holders, as well as to maintain large sums of cash and short-term investments at all times. With longer-term investments, insurance companies cannot take the same kind of risks that banks can. As Time reported in 2008, insurance companies on the whole placed only about 10 percent of their investments in real estate and mortgages, risk categories that inflicted significant losses to banks that were more heavily invested in them. The one insurance company that required a bailout, AIG, suffered its heaviest losses from its financial services division, a business segment that most insurance companies do not have. Its insurance division remained solvent and protected.

While the AIG case was an outlier, it still raised legitimate red flags among the general public. And the truth is that there have been many instances of smaller insurance companies fading into oblivion. What would happen if a large insurance institution like AIG failed?

As Time wrote in 2008 about such a possibility, “Even if a company were to fail outright, consumers are protected much in the way that routine bank deposits are guaranteed by the FDIC.”

Safeguarding against a potential failure is the Insurance Guarantee Fund, which every insurance company is legally required to pay into, and which is also managed by state-sanctioned insurance guaranty associations. These associations are charged with protecting policyholders and claimants in the event of solvency issues with insurance companies, and can even step in to take over servicing the policyholders of companies that fail. They are legal entities backed by the insurance commissioner in every U.S. state.

Unlike banks, insurance companies can’t reward executives from reserve revenue or apply it toward the nebulous category of operating expenses. That “excess” money must be legally dedicated to the claims of policyholders. As an added protection for policyholders, a failing insurance company cannot access federal bankruptcy laws to escape liability for its debts.

Of course, no company or individual is immune from financial setbacks or crashes. But then, if that is the reality of the situation, why not use the relative comparative solvency of insurance companies to one’s benefit?

That is exactly what some of the largest corporations in the world have done in recent years. Below are 10 stories that present a trend of corporations transferring the liabilities of their pension plans into the safety of indexed annuities with insurance companies.

Free Guide: High Profile Use of Annuities

Corporations Move Pensions into Annuities with Insurance Firms

1. “GM Unloads $26 Billion in White-Collar Pensions; Could Union Workers Be Next?”
Forbes; June 1, 2012
https://www.forbes.com/sites/joannmuller/2012/06/01/gm-unloads-26-billion-in-white-collar-pensions-could-union-workers-be-next/?sh=20357ddd3213

2. “Kimberley-Clark buys annuities to cover pension risks”
Business Insurance; Feb. 23, 2015
https://www.businessinsurance.com/article/20150223/NEWS03/150229961

3. “Molson Coors transfers $900 million in pension liabilities”
Pensions & Investments; Dec. 4, 2017
https://www.pionline.com/article/20171204/ONLINE/171209946/molson-coors-transfers-900-million-in-pension-liabilities

4. “DuPont to pump $30 million into pension plans in 2019”
Pensions & Investments; Feb. 12, 2019
https://www.pionline.com/article/20190212/ONLINE/190219954/dowdupont-to-pump-430-million-into-pension-plans-in-2019

5. “Eastman Chemical buys annuity to transfer $110 million in pension liabilities”
Pensions & Investments; Feb. 23, 2021
https://www.pionline.com/pension-risk-transfer/eastman-chemical-buys-annuity-transfer-110-million-pension-liabilities

6. “Centrus Energy kindles annuity deal for $30 million in pension liabilities”
Pensions & Investments; March 19, 2021
https://www.pionline.com/pension-risk-transfer/centrus-energy-kindles-annuity-deal-30-million-pension-liabilities

7. “FedEx to ship $500 million to pension plans”
Pensions & Investments; July 20, 2021
https://www.pionline.com/pension-funds/fedex-ship-500-million-pension-plans

8. “Lockheed Martin offloads $4.9 billion in pension liabilities”
Pensions & Investments; Aug. 3, 2021
https://www.pionline.com/pension-risk-transfer/lockheed-martin-offloads-49-billion-pension-liabilities

9. “CTS unloads pension liabilities with annuity purchase”
Pensions & Investments; Aug. 4, 2021
https://www.pionline.com/pension-risk-transfer/cts-unloads-pension-liabilities-annuity-purchase

10. “Macy’s purchases annuity to transfer $256 million in pension assets”
Pensions & Investments; Sept. 7, 2021
https://www.pionline.com/pension-risk-transfer/macys-purchases-annuity-transfer-256-million-pension-assets

Why would these corporations have taken these actions with billions of their pension dollars, which they’re liable for, if they didn’t believe in the solvency of insurance companies? They have made the determination that, while risk can never be ruled non-existent, it can absolutely be minimized.

This trend is causing ripple effects in the general public, especially among those who are getting closer to retirement age and want to protect their savings from market volatility. The same financial instruments that these corporations are using to shield their pensions from risk with insurance companies—indexed annuities—are sought after by retirees for the protection of their “private pensions,” or retirement savings.

As is the case with the public pensions of corporations, individuals can use indexed annuities to create their own pensions and receive a predetermined monthly income throughout their retirements. It’s the same basic income stream that pensioners receive from corporations who moved pension funds into indexed annuities. Private policyholders of indexed annuities enjoy the same protection from risk as these giant corporations.

There are even ratings agencies that help consumers navigate which insurance firms are generally thought to be the most solvent. As detailed in a story from Forbes last year, “Insurance companies are rated on their financial strength by independent agencies that each have their own rating scale and standards. The five rating agencies are:

1. A.M. Best, which rates companies on a scale of A++ to D-

2. Fitch, which rates companies on a scale of AAA to D
   3. Kroll Bond Rating Agency, which rates companies on a scale of AAA to D
   4. Moody’s, which rates companies on a scale of AAA to C
   5. Standard & Poor’s, which rates companies on a scale of AAA to D
   The highest ratings are given to companies that the ratings companies believe are in the best positions to meet their financial obligations.”

    

   The Insurance Information Institute is another source of consumer-centric information about the insurance industry. The institute recommends that people reference more than one rating agency in their searches, since ratings can fluctuate from agency to agency. Some insurers will also list their ratings on their websites, though they may not be the most current rating.

   Policyholders also have the ability to change insurance companies if they wish, so it’s important to keep updated on any downgraded rating reports. Middle-of-the-pack ratings should not be a cause for concern, but policyholders may want to take proactive steps if their insurance company receives a low-end rating.

Regulators and auditors monitor the insurance industry more than almost any other industry in the world. That’s important. But how does it assist a financial advisor’s practice? For starters, it provides advisors with concrete evidence to explain to their prospects and clients that all risk is not the same. Surprisingly, many people who are invested in the market do not grasp this basic truth.

The stock market is a fantastic tool for investors to realize growth. To think that insurance tools like indexed annuities carry a comparable risk as stocks, as some people errantly believe, is insanity. They are not even remotely equal in risk. In fact, the indexed annuity is a comprehensive risk slayer.

Advisors do themselves a disservice by not letting their prospects and clients know that insurance companies have long been trusted as the most solvent firms in the financial industry; that some of the wealthiest corporations in the world trust their money with these insurance companies.

These corporations understand that, as the world’s risk managers, insurance firms are better-equipped to manage long-term pension liabilities. The tools most of these businesses use to protect billions of pension dollars is the indexed annuity. Why wouldn’t a client want their life savings to enjoy the same protection? The financial advisors who can best inform people about financial risk, and the most effective ways to minimize it, will enjoy a lasting edge over their competitors.

For more information on indexed annuities and an exclusive interview with Tucker Financial’s Darren Petty, click here.

References

Notes:
For more information about the insurance industry or to receive a downloadable white paper on addressing indexed annuity concerns, email Kyle.Savner@TuckerAdvisors.com or Jason.Demers@TuckerAdvisors.com.

Sources:
1. Time Magazine (http://content.time.com/time/business/article/0,8599,1849023,00.html)
2. NAIC.org (https://content.naic.org/)
3. Investopedia.com (https://www.investopedia.com/terms/i/insurance-guaranty-association.asp)
4. Forbes (https://www.forbes.com/advisor/life-insurance/company-out-of-business/)
5. Insurance Information Institute (https://www.iii.org/)

– For Financial Professional Use Only. Insurance-only agents are not licensed to offer investment advice.

Indexed Annuities: The New Retirement Pensions?

By Sam Deleo
Tucker Advisors Senior Content Specialist/Editor

Defined-benefit plans. Those of us who are older might remember them better as “pensions,” but in 2021 they seem about as common as a rotary phone. (Sorry, but we don’t have time to explain what that is.)

Investopedia.com reported in a story last year that only 17% of U.S. private-sector workers still have access to pension plans. With many of the plans still in existence, employers have placed a freeze on funding them, which is often the beginning of the process to eliminate the plans altogether. In other words, the large majority of us can no longer rely on our employers to fund our retirement plans. We are on our own.

The Pros and Cons of the 401(k)

The most common replacement of the defined-benefit plan has been the defined-contribution plan, or, the 401(k). The 401(k) often offers a traditional pre-taxed account and a post-taxed Roth account, with both sourced in a blend of stock and bond options the employee must choose and maintain with the appropriate risk tolerance until retirement.

Some of us are lucky enough to work for employers that match a percentage of 401(k) contributions. However, in recent years, that benefit has also become rarer. Ultimately, it is up to the employee to secure their future income from the 401(k) choices they make. And as James McWhinney at Investopedia writes, that’s far from a certain outcome:

“After the money hits the account, it’s up to the employee to choose how it’s invested—typically from a menu of mutual funds—and the vagaries of the stock market to determine the ultimate outcome. Maybe the markets will go up, and maybe they won’t.”

The 401(k) plan does offer advantages over pensions for employees. For one, it can be a better instrument for growing retirement savings. Also, workers no longer need to worry about whether their employer can fund the pension or will declare bankruptcy to escape liability for it. But, without pensions, employees also can’t predict an exact monthly income for their retirement. In a 401(k), the income they plan on for retirement rises and dips with the market, and they must hope that none of the “dips” turn into downturns or crashes while they’re preparing to retire.

Free Guide: High Profile Use of Annuities

What Does an Indexed Annuity Do?

Even if market risk isn’t your thing, playing it safe has its own problems. With interest rates for bank accounts, CDs, money markets and even bonds lower than the current rate of inflation, workers will actually lose money year to year by investing in those savings instruments.

So, what is the most efficient tool for creating your own retirement pension? While there are more elaborate and hands-on approaches, more and more retirees are finding the solution is to fund an annuity with a portion of their 401(k).

“One user-friendly version of self-funded pensions is the indexed annuity,” said Tucker Financial President and CFP, Darren Petty. “It functions much like a ‘cash-balance pension plan,’ a defined benefit plan created by the Employee Retirement Income Security Act (ERISA) of 1974, except the annuity version is funded by the employee at or near retirement, usually with a portion of their 401(k) balance.”

An indexed annuity is an insurance vehicle that can guarantee a reliable monthly income over the lifetime of the policy holder, with the remaining balance payable to owner’s beneficiary(ies). The cash balance can grow at a stated interest rate, much like a bank CD, or it can have greater growth opportunity if the owner chooses an indexed option. This “links” the annuity cash value to a stock index like the S&P 500. When the market grows, the annuity cash value grows. When the market declines, the annuity doesn’t lose value because it isn’t directly invested into equities. To be fair, these annuities aren’t to be compared to a stock portfolio in terms of overall growth opportunity, but they can earn a respectable rate, all without market risk.

Why Are Corporations Moving Pensions into Annuities?

When you consider that indexed annuities de-risk principal and can guarantee a reliable monthly paycheck, it’s easy to understand why retirees are finding them to be attractive pension replacements. Even major corporations, such as GM, FedEx, DowDuPont, Lockheed, Molson Coors, Kimberley-Clark and others, have transferred their pension funds into annuities. These corporations understand that insurance firms act as the world’s risk managers and are better-equipped to manage long-term pension liabilities.

Critics of annuities claim they carry high fees, and this is particularly true of variable annuities, which have fees ranging from 2% to 5%. The lower-cost indexed annuity typically comes with a 1% or less annual fee, depending on the retiree’s deferral period (years until retirement). Others say you can make more money by investing in stocks. It is true that you might grow money faster in stocks or mutual funds, but creating your pension income at retirement is still the goal of this growth. Another common critique is that indexed annuities “tie up your money,” but in fact, most offer between 10% and 20% liquidity each year. “This (liquidity) is far more than you should ever access,” said Petty, “when you consider that all distributions are fully taxable if the annuity has been funded by 401(k) dollars.”

Indexed annuities are not for everyone, and they may not be for you. If you’re still well within your accumulation years, you can take greater amounts of risk in the market. For those who are, say, less than 40 years old and have the time to recover any potential loss from riskier market investments, it may be wise to wait before investing in an indexed annuity. And, if you are a very high-net-worth investor who does not require secure monthly income for retirement, an indexed annuity is likely superfluous.

But the recent trend toward indexed annuities as an alternative to other retirement income solutions is not an accident. People want the security of the old pension plan. They’re finding they can come very close to recreating that financial period of history with a carefully selected indexed annuity.

We spoke with Darren Petty a bit more in depth about what he sees as the similarities and differences between the old pension plan and today’s indexed annuity, as well as other possible methods of creating this kind of income.

Q: How can retirees most efficiently receive pension-like income throughout their retirement?

A: There are several options within just the categories that are appropriate for retirement income. You have dividend-paying stock portfolios, laddered-bond portfolios, rental income or annuities. Within these categories, we look at four main things: income, growth, liquidity and tax efficiency. So, within those four categories, the most efficient for those who don’t want to be tied to managing their investment constantly during their retirement is the self-funded annuity. It provides reliable income, respectable growth, sufficient liquidity and tax efficiency. The fifth, bonus aspect is that it requires no monitoring or maintenance. Q: What are the advantages and disadvantages of dividend-paying stocks for retirement income? A: The advantage is that you can get stock growth and receive a monthly income when the sun is shining, so to speak, and the tide is high and all boats are floating. So, in an expansionary economy, they’re great. In a recessionary economy, the stock value goes down and its dividend often disappears. As Warren Buffet said, “Only when the tide goes out do you discover who’s been swimming naked.”

Q: What are the pros and cons of annuities for retirement income?

A: Some of the cons are that they can’t compare to your stock portfolio. The growth potential can be disappointing if compared to a high-flying stock. They are also not 100% liquid. The advantages contrast the disadvantages. While your annuity will not experience outsized growth, the vehicle has no downside risk, which makes it appropriate for an income-producing asset where moderate gains that never experience a market loss are sufficient. Also, 100% liquidity is an insane request on a 100% tax-deferred vehicle.

Q: Can you talk about the key differences between employer pensions and self-funded annuities?

A: If you have an employer pension, the advantages are that you don’t have to allocate or manage the investment. Your retirement income is easy to calculate, and it’s a clear trajectory. In a 401(k), as we’ve discussed, it will be a bumpier ride but you’ll be able create your own pension that you own and control. And an indexed annuity will likely be a large part of that creation.

Q: How much of a retiree’s income should be “guaranteed,” i.e., how much of the 401(k) should be used to fund an annuity?

A: I think that is a very practical question for people. So, this should be a reverse-engineered calculation where you subtract Social Security benefits from your required annual retirement income, and fund an annuity to cover the difference. For example, if your goal is $100,000 in annual income, and $50,000 of that is in Social Security benefits, you would fund an annuity for the other $50,000. That may require anywhere from 40% to 70% of your 401(k), but that’s the purpose of 401(k)s, to fund retirements. Our approach is that we’re trying to leave as much outside the annuity as possible but still make sure that the client has zero lifestyle risk. That’s our goal, to keep as much of your investible assets out of the annuity while still securing your monthly retirement needs.

For decades now, the financial industry has presented indexed annuities as products. Some financial advisors used them in ways that did not maximize their advantages for the client. So, advisors themselves are somewhat to blame for indexed annuities only now receiving their due as powerful financial instruments when used the right way to fund retirements.

Determining the correct amount for your “annuity pension” is something a good financial advisor will help you with by providing a context for a comprehensive financial plan. The indexed annuity can play a crucial part in any financial portfolio that seeks a balance of growth and security. Even more exciting, when used the right way, indexed annuities can serve as a worthy substitute to the pension era that retirees once enjoyed.

Notes

For more information about indexed annuities or to receive a downloadable white paper on addressing annuity concerns, email Kyle.Savner@TuckerAdvisors.com or Jason.Demers@TuckerAdvisors.com.

Sources:
1. Investopedia.com
2. MedicareWallet.com

– For Financial Professional Use Only. Insurance-only agents are not licensed to offer investment advice.

WILL I HAVE TO BECOME A FIDUCIARY? 

By Sam Deleo
Tucker Advisors Senior Content Specialist/Editor

If you’re a financial advisor, you have likely heard about the Department of Labor’s recent fiduciary rules. The larger question for the industry as a whole remains, where will these rules take us next?

The word “fiduciary” refers to any advisors who must legally prioritize their clients’ interests above of their own. When advisors are not fiduciaries, they follow what is called the “suitability” requirement, which is basically an ethical call to follow the same prioritization of interests.

According to the Department of Labor’s (DOL) website, the identification of a fiduciary follows ERISA standards and the five-part DOL test, based on the assumption that anyone who offers investment advice for a fee, commission or other compensation, will be regarded as a fiduciary.

Download Your Free
Referral Marketing Guide

Five-Part Test for Status as an Investment Advice Fiduciary

For advice to constitute:

“investment advice of a fiduciary, a financial institution or investment professional who is not a fiduciary under another provision of the statute must:

1. 1. Render advice to the plan as to the value of securities or other property, or make recommendations as to the advisability of investing in, purchasing, or selling securities or other property,
   2. On a regular basis,
   3. Pursuant to a mutual agreement, arrangement, or understanding with the plan, plan fiduciary or IRA owner, that
   4. The advice will serve as a primary basis for investment decisions with respect to plan or IRA assets, and that
   5. The advice will be individualized based on the particular needs of the plan or IRA.”

The DOL text goes on to say that a “financial institution or investment professional that meets this five-part test, and receives a fee or other compensation, direct or indirect, is an investment advice fiduciary under ERISA (Title I) and under the Code.” Additionally, “Title I of ERISA and the Code each contain provisions forbidding fiduciaries from engaging in certain specified ‘prohibited transactions’ involving plans and IRAs, including conflict of interest transactions, unless an exemption applies.”

While this update has not enforced any further regulation on the financial industry, many believe that day is coming. We recently interviewed Lloyd Domingos, Senior Director of Operations for Tucker Asset Management, about the current regulatory landscape and what he sees unfolding as we move forward.

1. Could you give a brief summary of what the current regulations mean for advisors?

Lloyd Domingos – Basically, the current rule, in a nutshell, would force insurance-only agents to act as fiduciaries—not get paid as a fiduciary, but to have the obligation to act as one. So basically, they’re going to turn you into a fiduciary whether you like it or not. But, if you don’t get your Series 65, you’re not going to get paid as a fiduciary. And you could potentially write less business, because clients will perceive that you’re not a holistic advisor, that you don’t perform the complete duties of an advisor in an all-encompassing way for your clients. Now, they haven’t begun enforcing the new definition of “fiduciary” as part of the rule. But that is supposed to begin on Dec. 20, 2021.

2. What does the IRA rollover exemption mean for advisors?

Domingos – This doesn’t mean that you can no longer roll over an IRA. But, if doing so would earn you money, you will likely need additional disclosures, documentation, policies and procedures, and annual review requirements. Again, this action cannot just help your pocketbook, it has to be in the best interest of the client.

3. How do you interpret the DOL’s “best interest” standard?

Domingos – It has to be the very best interest of the client. It can’t just be the “suitability requirement” anymore. It can’t be an action that is very good for the client, but not “the” best. Who is going to determine what this best interest is? The SEC? The client? The DOL? We don’t know that yet.

4. What are the key points advisors need to beware of in order to be in compliance with the present definition/regulation regarding IRA rollovers?

Domingos – I thought RIA in a Box provided a good summary of these points:
The new prohibited transaction exemption, which was affirmed by the Biden Administration on Feb. 16, 2021, “provides RIA firms with two options as relates to IRA rollovers:

1. Provide only general investment education regarding rollovers. Here, the RIA firm would not need to avail itself of the new prohibited transaction exemption; or
2. Provide investment advice regarding rollovers that affects compensation. Here, the RIA firm would need to utilize the new prohibited transaction exemption, with requirements including advice subject to the ‘Impartial Conduct Standards’ and a series of other disclosure, documentation, policies and procedures, and annual review requirements.”

5. There has been a lot of talk in recent years of potential new regulations for advisors, which some say could happen by December 2021. Could you comment on some of those possible changes?

Domingos –  I don’t want to speculate too much here. But the path the industry has been on over the last five to 10 years has definitely been one of more regulations, more processes and more standards to follow, not less. So, if anything, my opinion is that it will get harder to do business and not easier.

6. What do you see as the key areas of concern for advisors moving forward?

Domingos – Familiarize yourself better with the definition of “fiduciary” so you know it backwards and forwards, because it’s your livelihood. And take steps, whatever you deem necessary for your practice, to ready yourself for what might be further regulation, or at least more explicit regulation.

7. Why do you think the regulatory environment has changed and may continue to evolve?

Domingos – While many investment advisors and insurance agents truly have the best interests of their clients at heart, unfortunately, there have been the Bernie Madoffs of the world that have heightened the regulatory environment. That story, because of its sensationalism in the media, became somehow representative, when in fact, it really isn’t at all. But that’s just kind of the nature of how many of us react to big media stories like this, so people also likely expressed concerns to government agencies that they might not have expressed before, as well.

8. Are there steps that advisors can take now that will safeguard them from the potential new regulations?

Domingos – I don’t want advisors to think that if they get a Series 65 that it will cure all ills, but having a Series 65 means that you are already held to be a fiduciary in the eyes of the SEC. And most of these regulatory standards are part and parcel of what you already do, because you’re already held to that standard. Most Series 65 advisors’ compensation is fee based. That appeals to consumers, and rightfully so. If the consumers’ balances grow, so does the compensation for the advisor, because their fees are proportionally based on the client balances. But if the balances decrease, so does the balance for the advisor. So, everyone is in step. Neither party benefits while the other doesn’t. There’s a direct correlation.

9. What are the consequences of an advisor simply doing nothing now and waiting to see what happens?

Domingos – Worst-case scenario, you could find yourself going out of business. This could be the precursor to even more extensive regulation. Again, that’s why the Series 65 is important.

10. What assistance is out there for advisors who want to be prepared moving forward?

Domingos – There are educational materials and courses out there that advisors can find by searching online pretty easily. As an example, for advisors who qualify, Tucker Asset Management regularly hosts Series 65 Training Courses that advisors can take. We provide the classes and we pay for many of the costs associated with obtaining the Series 65 license. There is help out there for advisors.

We acknowledge that this is far from a comprehensive summary of the current regulations in our industry, and encourage you to research these issues on your own. It will be time well spent for your business.

We plan to closely follow this fiduciary definition and the regulations that may affect it later this year. Ignoring these issues as a financial advisor is no longer an option. The consequences can dramatically affect both the ways we do business and the potential success of those efforts.

Notes

For more information or assistance about fiduciary regulations, email Kori.Brooks@TuckerAM.com.

Sources:
1. The U.S. Department of Labor
2. RIAinaBox.com
3. ThinkAdvisor.com
4. MSN.com

– For Financial Professional Use Only. Insurance-only agents are not licensed to offer investment advice.