A few weeks back, I wrote about having a financial health day at work. With the help of some of my Foolish colleagues, we’ve created a PDF that outlines how to host your own financial health day at work, including a checklist of what to consider accomplishing during the day.
As you’ll read, a key component of the financial health day was classes taught by experts we invited to Fool HQ, including several fee-only financial advisors from the Garrett Planning Network. Which brings us to the topic of today’s post: how to pay for help from a financial professional. It all begins with my experience as one myself.
My Short Life as a Stockbroker
Way back when (in those crazy, hazy, dot-com-zy days of the 1990s), I put on a suit every workday and headed to the offices of Prudential Securities, where I was a (very junior) member of team that managed $200 million. I started off as essentially an office gopher, and ended up being a licensed broker in a span of about two years (at which point I left to join The Motley Fool).
The term “broker” is important; it means I earned commissions for sales of stocks and mutual funds. I also was a licensed insurance agent, and earned commissions for selling insurance products such as annuities.
Now, the fellows I worked work were smart and ethical, and I’d trust them with my own money. And they’re not the only good brokers in the industry; I know plenty of them. But I saw enough to know that this is an industry driven, first and foremost, by people who want to make a lot of money for themselves. That money doesn’t materialize out of thin air; it comes straight from their clients’ accounts and into their own.
As part of my training, I spent three weeks in New York City. During the day, we heard from various representatives of the firm’s departments — the bond desk, the equity analysts, etc. We weren’t being taught how to choose better investments for our clients; it was more of an introduction to how the firm worked. Then, we’d learn sales techniques. At night, we practiced them by making cold calls while instructors listened in, giving us advice after the call on how to provide more “sizzle.”
When I joined the firm, I thought I’d be getting “the keys to the kingdom” in terms identifying the best investments. After all, this is a big-name Wall Street firm; they surely knew how to beat the market. Alas, it was not true. I learned more about investing from reading a collection of good books than I did from Prudential’s training. What I did learn was that recommending certain investment products resulted in a bigger payday for the broker than recommending others — regardless of what was best for the client — and that many brokers weren’t able to overcome (and loath to disclose) this conflict of interest.
The Fee-Only Way
Is there a way to get financial help without this conflict interest? Yes, there is — by hiring a fee-only financial advisor. Such an advisor gets paid by the hour, by the project, or — if they will be managing your money — as a percentage of the assets under management. These folks have just one incentive: provide good advice. You know they will recommend what they really think is the best course of action, because they get paid the same no matter what they recommend.
Here are a few other reasons why I like fee-only planners:
If you walk into your local Merrill Lynch, Morgan Stanley, or some other brokerage, the advisor you speak with will care mainly about your investments, and maybe your insurance, because that’s how they get paid. (Don’t expect much guidance on the money in your 401(k), because they can’t get paid for providing advice about that.) Fee-only advisors, on the other hand, take a look at the whole picture, from debt to cash flow to employee benefits to estate planning.
Many fee-only planners will work on an as-need basis. Perhaps you just need help answering one or two questions, such as whether you’re saving enough for retirement. Or you’d like to continue handling your own finances, but you want an objective second opinion to make sure you’re on track. An hourly fee-only advisor can help you. It’s not exactly cheap — approximately $150 to $200 an hour. But not spending that money can be hundreds-wise but thousands-foolish.
Fee-only planners tend to have professional designations, such as Certified Financial Planner or Chartered Financial Analyst. Plenty of brokers have those designations, too, but not as many, percentage-wise. Such a designation doesn’t guarantee good behavior or perfect advice, but it does mean the advisor knows enough to pass very rigorous exams and fulfill continuing education credits, including classes in ethics.
Most fee-only planners are fiduciaries, which means they are legally obligated to put their clients’ interests first. Surprisingly, and appallingly, the typical broker is not a fiduciary, and is held to a lower standard. I won’t bore you with all the legalese, but it has been in the news lately since it’s a part of the debate about financial reform. Just know that it’s a topic you should research and bring up with any financial advisor you consider hiring.
Where do you find such a fee-only planner? The Garrett Planning Network is a start. Visit their locate an advisor page and click on your state to see if there’s an advisor in your area. (In the interest of full disclosure, and revealing my own conflicts of interest, The Motley Fool has a partnership with Garrett, but no money has changed hands. It’s more of a “we like each other, so let’s spread the good word about each other” type of arrangement.) Another option is the National Association of Personal Financial Advisors, or NAPFA. Finally, you can use the PlannerSearch tool of the Financial Planning Association, and specify “Fee Only” under the “How Planners Charge” link.
Fee-only advisors are independent, and have their own ways of doing business. So not every fee-only advisor will manage money, and not every one will work on an hourly basis. Determine what you need, and find an advisor who will work on your terms — and put your interests first.
BlackRock, one of the world’s largest financial firms, says three key moves can sharply boost retirement income. Most people focus on building up their savings when they make retirement plans. However, by also focusing on the drawdown phase, the duration of the nest egg that you have accumulated can be significantly extended, BlackRock says in a recent report.
Consider working with a financial advisor as you develop a long-term retirement plan for yourself.
Add Guaranteed Lifetime Income via an Annuity
Annuities have become a hot topic in recent years, as financial professionals have increasingly debated their pros and cons. On the upside, they hedge against longevity risk. A lifetime annuity can guarantee, aside from catastrophic failure on the part of the insurance company, that you will receive a minimum income for life. On the downside, annuities can sometimes post weaker growth than even the standard S&P 500 index fund.
BlackRock argues that the benefit of hedging against longevity risk, though, is quite powerful. By putting up to 30% of your portfolio savings into a retirement annuity, you can create a strong base for the future of your retirement income. Alongside Social Security, this gives you an income that never draws down and will not fade.
Shift to an Aggressive Asset Allocation
There’s a catch to an annuity plan, though. Perhaps the biggest risk with annuities, as noted, is their low rate of return. In fact, Fidelity says that in recent years annuities often return one-eighth the amount of a simple S&P 500 index fund. That’s a recipe for low, slow growth.
So, BlackRock suggests balancing your annuity investments with a more aggressive market portfolio. In other words, leverage the security that you have with your annuity to rebalance your portfolio toward higher-return assets like stocks, if even just a stock market index fund, like the S&P.
By doing this, you’re more protected against loss by the guaranteed income of the annuity, while also boosting your overall spending power in retirement with the projected growth of the equities. This lets you retain a strong equity portfolio later in life, when many investors would otherwise start shifting their investments in favor of more stable, fixed-income assets, like bonds or CDs.
“Adding guaranteed lifetime income combined with a more aggressive asset allocation generates 29% more annual spending ability from one’s retirement savings (excluding Social Security) and reduces downside risk by 33%,” BlackRock states in the report.
Retire (and Take Benefits) Later in Life
Finally, BlackRock recommends delaying retirement by two years. The firm suggests delaying retirement, along with Social Security benefits and annuity payouts, from age 65 until age 67. This is not, however, a delayed retirement. For anyone born after the year 1960, the goalposts have been moved back and full retirement age is set at 67.
The firm’s basic analysis still stands though. As the firm writes, “[a]mong all retirement decisions, the choice of when to retire and claim Social Security often has the single greatest impact on one’s financial security.”
Putting this off even by just two years can significantly boost your Social Security benefits. It will also give your annuities time to continue growing, making their lifetime benefits stronger, while allowing your portfolio to accumulate extra years of high-value growth as well.
BlackRock finds that pushing back retirement by two years can boost a retiree’s lifetime spending power by 16% and reduce downside risk by an additional 15%. In combination with the 29% retirement increase gained by getting an annuity and having an aggressive, stock market-based asset allocation, retirees can sharply extend the duration of their retirement income.
Bottom Line
For many investors, the good news here is that BlackRock probably recommends a version of what you are already pursuing: diversification. This approach suggests that you should balance high-security assets, in the form of lifetime annuities, against high-return assets, such as stocks. It recommends delaying retirement as a way of boosting your lifetime Social Security benefits and maximizing your late-in-life portfolio returns. For the average investor and saver, this is all very doable.
Retirement Savings Tips
A financial advisor can help you build a comprehensive retirement plan. Finding a financial advisor doesn’t have to be hard. SmartAsset’s free tool matches you with up to three vetted financial advisors who serve your area, and you can have a free introductory call with your advisor matches to decide which one you feel is right for you. If you’re ready to find an advisor who can help you achieve your financial goals, get started now.
Longevity risk is the possibility that you will live too long, and that’s a perverse way of looking at life. So start making plans right now to celebrate your hundredth birthday in style.
Eric Reed
Eric Reed is a freelance journalist who specializes in economics, policy and global issues, with substantial coverage of finance and personal finance. He has contributed to outlets including The Street, CNBC, Glassdoor and Consumer Reports. Eric’s work focuses on the human impact of abstract issues, emphasizing analytical journalism that helps readers more fully understand their world and their money. He has reported from more than a dozen countries, with datelines that include Sao Paolo, Brazil; Phnom Penh, Cambodia; and Athens, Greece. A former attorney, before becoming a journalist Eric worked in securities litigation and white collar criminal defense with a pro bono specialty in human trafficking issues. He graduated from the University of Michigan Law School and can be found any given Saturday in the fall cheering on his Wolverines.
One of the biggest wealth transfers in history is about to unfold.
That is, it’s estimated that more than $68 trillion in wealth – involving 45 million households across the U.S. – will be transferred through inheritance in the next 25 years.
Will you be one of them?
If you’re a Millennial or a Gen Zer, chances are you may be in the group of Americans most likely to benefit from this massive transfer.
If so, you’ll need to know how to plan for an anticipated inheritance, even if you’re not sure of the details.
What’s Ahead:
1. Have a rough idea of the amount that you are set to inherit
Though this seems like a simple step, it often isn’t.
Not all parents or grandparents are open about their personal net worth (it’s a generational thing). And asking how much you can expect to inherit – or, if you’ll be inheriting anything at all – can seem presumptuous at best, and greedy at worst.
Some parents and grandparents will be open to this question. Some may even provide the information without you asking. But if that’s not your situation, you’ll need to proceed carefully and delicately.
How do I find out how much I will inherit?
You probably already have an idea of your parents’ approximate net worth, but if you don’t, don’t beat yourself up. After all, it isn’t always that obvious on the surface.
The best way to find out?
Just ask.
If your parents aren’t forthcoming about their finances, you’ll need to step back. That doesn’t mean giving up, however. You can let some time pass, then approach the subject later. Just be sure to frame it in such a way that you’re interested in protecting all they’ve worked so hard to accumulate.
2. Learn what makes up the inheritance
Some estates are very simple, while others can be incredibly complicated. The best scenario is a parent who rents his or her home (no house to sell) and has nearly all wealth sitting in financial assets, like bank and brokerage accounts.
Things get way more complicated when a large share of the estate is held in real estate, and especially investment real estate. More complicated still is business equity.
Collectibles, like jewelry and artwork, can also be problematic. You’ll first need to get a ballpark estimate of the value. But before they can be sold, they may need to be formally appraised.
Just as important, your parents may prefer to pass real estate, business interests, or collectibles to specific individuals. That may or may not include you, which is something you need to know before you plan to inherit them.
3. Know if there are other beneficiaries
This is as delicate an issue as requesting the value of your parents’ estate. If you are the sole beneficiary, it’s a non-problem. But if there are siblings, or others your parents may want to distribute assets to, the waters can get a bit muddy.
In a perfect world, your parents will set up an equal distribution for you and your siblings. But real life isn’t always so simple.
For reasons known or unknown to you, your parents may choose unequal distributions. This can be due to family politics, like one sibling being favored over the others, or one sibling being closer to your parents than others. In some situations, parents may choose to give a larger share to a child who provides for their direct care in their later years.
There may still be other situations where your parents want to make special provisions for one of your siblings or even a grandchild.
Yes, it can get worse!
But those aren’t even the most complicated beneficiary situations.
Given that divorce is common, and often involves a second set of children, there may be issues and limitations.
In some extreme situations, parents may disown one or more children, and exclude them from the inheritance. If that might be you, you’ll need to know.
Finally, complicated family situations can result in probate. That’s where the estate has to go before a judge prior to distribution. This can happen because of the nature of the family situation, or because one or more potential beneficiaries (or even an excluded party) challenge the distribution of the estate proceeds.
If that situation seems likely, it’s one that should be discussed with your parents. They may need to set up a trust to ensure each beneficiary gets the intended distribution so the estate can avoid probate.
4. Understand the intended distribution process
This primarily has to do with the timing of inheritance distributions. While the conventional distribution method is to distribute all beneficiary shares on a common date when the estate is settled, that’s not always the case.
Parents sometimes arrange to have estate assets distributed gradually.
For example: if one or more beneficiaries is considered to be irresponsible with money, the parents may set up a staggered distribution over a period of several years.
A staggered distribution is often accomplished through a trust. If your parents have set up a trust, either for part or all of the estate, you’ll need to know of its existence, as well as the intended distribution.
Some trusts are even more specific
For example, they may include provisions that will distribute funds based on certain milestones. Common examples include holding distributions until the beneficiary turns 30 (or some other age), or gets married (or divorced, if the marriage is shaky).
Trusts can be amazingly specific, which is why people set them up. That’s also why you’ll need to know any distribution method that will be used.
Some estates may also have provisions to make staggered distributions based on asset types.
For example: cash-type assets may be distributed early in the estate process. But real estate and business interests may not be distributed until they have been liquidated.
5. Estimate your personal finances at the anticipated time the inheritance happen
A big part of how you handle an inheritance will be determined by your own financial situation.
If you already have a sizable personal estate, you may be able to simply fold the inheritance into your existing plan. But if your finances are limited, you may need to be more intentional and figure out what you’re going to do with the inheritance when it arrives (ya know, so you don’t blow it all on a bright red Mustang).
The point is, only when you have a clear picture of your own finances can you make the best use of an inheritance. And to get the greatest benefit, it can help to improve your finances before you receive the money. The better positioned you will be when the inheritance comes in, the more flexibility you’ll have in choosing where to allocate the money.
If you’ve not been investing up to this point, you may want to begin before the inheritance comes in. It’s best to get investment experience with a small amount of money, so you don’t risk losing your windfall through poor investment choices.
Read more: Best Investment Accounts For Young Investors
6. Design a plan (aka what to do with the inheritance)
If you already have your own personal financial plan, planning for an inheritance will be much easier. But even if you do, you should have at least a loose plan for what to do with the new money. The worst choice is holding off until the inheritance is received. Without a solid plan, you may quickly draw down the new money, financing a series of wants.
Having a plan for the inheritance will ensure the money will provide for a better future. To learn how to set up a financial plan, check out our article: What Is A Financial Plan And Why Do You Need One?
Decide what your priorities are
The main purpose of a plan is to set up a series of priorities.
For example: if your retirement planning isn’t where you want to be, you can make it a priority to fix that with the inheritance. You can either use the new money to enable you to make larger retirement plan contributions or plan to set up an annuity specifically for retirement.
Take advantage of annuities
One of the advantages ofannuitiesis that they can be used to shore up an adequate retirement plan.
Read more: What Is An Annuity And Should You Consider One?
The investment earnings on annuities accumulate on a tax-deferred basis, like retirement plans. But the major advantage is that there are no limits to your contributions. You can make a single, large lump sum contribution to an annuity and let it grow tax-free until retirement. You can set a date that distributions will begin, which can even cover the rest of your life.
In addition, Dr. Guy Baker, CFP and founder of Wealth Teams Alliance, also points out:
“Annuities are a fixed-income alternative. The opportunity to get a market return with no downside risk can be dramatically better than the income from an investment-grade bond of comparable risk. The amount to put into an annuity should coordinate with the age of the beneficiary and the investment objectives. In general, an indexed annuity can provide significant benefits for no additional risk.”
However, since annuities are complicated instruments themselves, you’ll need time to do research and evaluate the best one to take. That’s best done in advance of receiving an inheritance.
Consider starting your own business
In a different direction, maybe you’ve been dreaming of starting your own business. If you lack the capital to do that up to this point, the inheritance can make it happen.
In the meantime, you can make preliminary plans for the business, andeven get it up and running as a side hustle. When the inheritance arrives, you’ll have an established business to grow, rather than starting a new one from the ground up.
Starting a business is always risky, though, so make sure you carefully consider such a big move if/when you do receive an inheritance.
Read more: How To Start Your Own Business – A Complete Step-By-Step Guide
7. Find out if there will be tax consequences
You’ve undoubtedly heard the saying,
“the only things certain in life are death and taxes.”
Well, guess what? Sometimes the two happen at the same time.
Officially, they’re called inheritance taxes. Because estates can contain a lot of money, governments view them as rich revenue sources. Just like they tax your income, your home, your utility bills, and even your purchases, there are taxes designed to snatch a part of an inheritance before you receive it.
There’s good news and bad news here.
Let’s start with the good news…
There is a federal inheritance tax, but the good news is that it only applies to very large estates.
Under current IRS regulations, estates that transfer from one spouse to another are generally tax exempt. But even when they pass to other beneficiaries, like children and grandchildren, there’s a federal estate tax exemption of $11.7 million, for 2021.
That means if the total value of the estate (before distribution) doesn’t exceed $11.7 million, there’ll be no federal tax on the inheritance.
Now for the bad news…
18 states impose some type of state-level inheritance tax. And while some of those states match the federal estate exemption, there are no fewer than 13 with lower exemptions.
On the low-end, Massachusetts and Oregon can tax estates as low as $1 million. Rhode Island sets the threshold at $1,595,156.
Not many Americans have a net worth of over $11.7 million. But there are many millions with estates of $1 million or more. Even if you’re not affected by the federal estate tax, you may be subject to it at the state level.
If any of the estate tax thresholds may apply in your situation, whether at the state or federal level, you’ll need to be prepared for this outcome.
So make sure you estimate for a lower inheritance
The best strategy is to estimate a lower inheritance, based on applicable estate tax rates. Fortunately, the estate will pay the inheritance tax before the money is distributed. But you still need to be prepared for a lower distribution amount.
If your parents are open about your inheritance, you may even be able to discuss the tax consequences with them. That way they’ll be in a position to take action to minimize them before the fact.
8. Decide if you’ll need a financial planner
If you believe your net worth is too small to justify a financial planner right now, you may change your mind when you receive a large inheritance. But you don’t have to wait until the inheritance arrives to at least consult a financial planner.
If you know the approximate size of your inheritance, paying for a meeting with a financial planner may be money well spent. The financial planner can help you to make decisions to both set up your current finances in anticipation of the inheritance, as well as to make intelligent decisions when it actually comes.
The financial planner may also provide ideas you may want to convey to your parents. They’re often unaware of strategies that will minimize inheritance taxes, or create a strategic plan for a more successful distribution of the estate.
In addition, if there may be questions surrounding the estate, perhaps involving the children of a previous or subsequent marriage, the financial planner may recommend consulting with an estate attorney.
The more you can do in advance, the less likely it is you’ll be blindsided when the inheritance arrives and the stakes are higher.
Read more: Are Certified Financial Planners Worth The Money?
9. Decide if you’ll need a trust
If you don’t have one now, receiving a large inheritance might make a trust advisable. It may even be completely necessary if the inheritance is particularly large, or if you yourself have children from a previous marriage.
A trust is a way to protect your assets, and to ensure the money is distributed as you wish upon your death.
Shawn Plummer, CEO of The Annuity Expert, explains further:
“You may need a trust if you want to specify how your assets will be distributed without a probate court getting involved. While a will can achieve a similar purpose, wills have to be authenticated by a probate court and can require more time and money.”
Just as important, a trust has the potential to protect your assets from seizure by creditors, or from litigation. With the larger personal estate the inheritance will create, you may need just that kind of protection.
And don’t worry, you won’t need to pay an arm and a leg to get these documents drawn up. Trust & Will offers estate planning help with plans starting at just $39. This can help you avoid racking up a high bill with an estate planner.
Summary
You’ve probably known of situations where someone came into a large windfall, only to be broke a few short years later. Unfortunately, it’s not an uncommon outcome.
The sudden arrival of a large amount of money can cause an unprepared recipient to blow what could be a life-changing opportunity. It could have the potential to dramatically improve your finances and your life.
You’ll need a plan to make that happen, and it’s never too early to start drawing one up.
Symetra Life Insurance Company boasts more than half a century of offering life insurance coverage to valued clients. Over time, this insurer has exceeded $35 billion in assets and 2 million clients throughout the United States.
Symetra has its headquarters in Bellevue, Washington, while the company sells its products in all states excluding New York.
Established in 1957, the insurer has made many strides in the insurance and financial industry. For example, in 1976, Symetra pioneered the medical stop-loss product – which today is a key product in the medical insurance marketplace.
In 1987, Symetra started selling its annuity products through the banking channel, and in 1999, exceeded the $30 billion mark of life insurance in force. In 2004, the insurer transitioned into an independent company – Symetra Financial Corporation, and in 2016, it joined Sumitomo Life, a global life insurer.
The products sold by Symetra Life Insurance Company are offered through brokers and financial advisors, banks, and a network of independent insurance agents.
The primary products provided through Symetra include life insurance protection, along with annuities, retirement, employee benefits, and medical stop-loss insurance coverage.
Symetra Life Insurance Company Review
Today, Symetra is owned by parent company Sumitomo Life – which is considered to be one of the most prominent life insurance companies in Japan. The parent company has been in operation for over 100 years. Both Symetra and Sumitomo Life have total assets surpassing $250 billion.
Symetra Life Insurance is currently recognized as a Top 3 seller of fixed deferred and fixed indexed annuities through banks. It is also a Top 40 U.S. life insurance company, based on admitted assets. In 2015, the company brought in roughly $2.2 billion in total revenues and nearly $147 million in net income.
In addition to offering insurance and financial products, Symetra is committed to the community. In 2015, Symetra contributed to nearly 900 charitable organizations, and its employees invested roughly 8,500 hours of volunteer service.
The company also does a great deal of advertising and sponsorship – including its Sports Illustrated Rising Stars campaign, The Symetra Tour – Road to the LPGA, the Symetra Heroes in the Classroom, and the “I Just Want to Fly,” highlighting the insurer’s commitment to helping people and businesses with reaching higher and flying further to attain their financial goals.
Symetra Life Insurance Company Ratings and Grades
A (Excellent) from A.M. Best. This is the 3rd highest rating out of a possible 16.
A (Strong) from Standard & Poor’s. This is the 6th highest rating out of a possible 21.
A2 (Good) from Moody’s Investor Services. This is the 6th highest rating out of a possible 21 and puts them in good company with Globe Life Insurance.
A (Strong) from Fitch. This is the 6th highest rating out of a possible 19.
Types of Life Insurance Available
Symetra Life Insurance Company brings a variety of life insurance products to the table.
This can be helpful for clients when fitting coverage to meet their specific protection needs.
The company offers term and permanent life insurance plans.
Term Life
Term life insurance provides pure death benefit coverage only. Because term does not include cash value, these policies are typically more financially feasible than comparable permanent coverage – all other factors being equal.
Term life insurance policies are purchased for a set period of time, such as ten years, 15 years, 20 years, or even for 30 years. The term plans offered through Symetra Life Insurance Company offer level premiums throughout the initial period. This can make these plans easy to budget for because the premium won’t budge during the initial policy’s term.
With these term policies, the policyholder may also have the option to convert the coverage over to a permanent life insurance policy without the need to prove insurability – or even having to answer any medical questions. Doing so can extend life insurance protection for the remainder of the insured’s lifetime – provided that premiums continue to be paid.
If the insured is diagnosed with a terminal disease, he or she may also be eligible to receive no more than 75% of the death benefit from their policy while still living – up to $500,000. This can allow the insured to pay for medical expenses or other outstanding bills and puts them ahead of Primerica life insurance for an all-encompassing term policy.
Symetra Life Insurance Company’s term life insurance policies also offer some additional riders that may be added to better meet an insured’s protection needs.
These riders are:
Insured Children’s Benefit
Additional Term Rider
Waiver of Premium
Accidental Death Benefit
Permanent Life
The permanent life insurance policies offered through Symetra Life Insurance Company provide an insured with a guaranteed death benefit, in addition to a cash value element. In other words, loved ones will be protected, while at the same time allowing tax-deferred build-up of savings within the policy.
There are a number of different permanent policies offered by Symetra:
Symetra UL-G Universal Life Insurance – The UL-G policy is a universal life plan. In other words, the policyholder has some flexibility when it comes to how much of the premium payment will go toward the death benefit, and how much will go toward the cash value component. Individuals who are between the age of 16 and 85 can apply for this plan, and it has a minimum death benefit of $50,000. There are also a number of optional riders available that may be added to fit the insured’s protection needs. Also, the amount of the premium may be reduced if the insured is between the age of 20 and 70, and he or she qualifies for Symetra’s GoodLife Rewards program.
Symetra SUL-G Survivorship Universal Life Insurance – The SUL-G is also a universal insurance policy that offers a guaranteed death benefit, in addition to ensuring that legacy planning goals are being met. This policy can also be a good option for estate planning and wealth transfer, as well as for business protection needs. It includes a lapse protection benefit so the policyholder can ensure the policy will be in force for as long as he or she would like.
Symetra CAUL Universal Life Insurance – This type of policy offers lifetime protection that can be tailored to an insured’s objectives, no matter if it is lifetime insurance protection or primarily cash value accumulation. This policy offers flexible premium payments and death benefit options, including the ability to use cash value as a future financial cushion for things like retirement income and/or paying off debts.
Symetra Universal Life Insurance (2008) – With Symetra Life Insurance (2008), an insured will get lifetime insurance coverage at a fixed cost. As a result, loved ones are now financially secure. This policy also offers several additional riders that can help with further customizing the insurance policy. It also offers an initial interest rate guarantee for 12 months from the date that the premium is received. In addition, this rate is guaranteed to be no less than 3%.
Symetra Successor Single Premium Life Insurance – With this form of coverage, the policyholder can designate a certain amount of money to his or her beneficiary exempt from federal income taxation. Plus, the financial worth of the insured’s estate will essentially go up the minute they purchase the insurance policy. With this plan, there is no need to worry about the policy expiring in the future. This is because it has a guaranteed death benefit that won’t terminate before the first policy anniversary following the insured’s 120th birthday. This policy also allows free annual withdrawals of no more than 10% of the accumulation value each policy year without a surrender charge.
Other Products Sold
In addition to just life insurance coverage, Symetra offers other products, too.
These include:
Annuities
Symetra offers a number of different annuity products. These can help individuals with saving for retirement, as well as ensuring they have an ongoing income that will last them throughout their retirement years.
Annuities offered by Symetra include the following:
Fixed Deferred Annuities
Fixed Indexed Annuities
Variable Deferred Annuities
Income Annuities
Employee Benefits
Symetra also offers employee benefits. The company’s knowledge of the marketplace, as well as its flexible policy designs, can help companies develop an employee benefit plan that best fits their business.
Stop Loss Insurance
Symetra is a pioneer in the stop-loss insurance arena. The company introduced the product to the market back in 1976, and it has worked to build one of the very best and largest medical stop-loss entities in the United States.
Americans Believe They Will Need $1.27 Million to Retire Comfortably, According to Northwestern Mutual Planning & Progress Study High-net-worth individuals expect to need $3 million to retire Gen Z aims to retire at age 60 – and expects to live to age 100 Expected retirement age climbs significantly in two years to 65 from 62.6 … [Read more…]
Annuities can help solve the biggest challenge of retirement.
When you save up for retirement, the two largest risks are intertwined. First, you risk not being able to pay your bills if you don’t properly calculate your annual spending. Second, you risk running out of money late in life if you don’t properly anticipate your lifespan.
A financial advisor can help you calculate how much retirement income you’ll need to generate once you stop working. Find an advisor today.
To help address these issues in tandem, insurance companies sell a product called fixed-index annuities or FIAs. These are designed to provide a baseline of growth-oriented income for the rest of your life. But, as Morningstar researchers recently pointed out, FIAs only work if you use them properly. Otherwise, they turn into money losers compared with more standard options such as fixed-income annuities or index fund portfolios.
What Is a Fixed-Index Annuity?
A fixed-index annuity is a contract you make with an insurance company. In exchange for money upfront the company will give you structured payments over time. Some contracts specify a duration for these payments, making them each month for 10 or 20 years, for example. More often people buy retirement assets called “lifetime annuities,” which start payments when you retire and continue for the rest of your life.
Fixed-income annuities make this payment based on a guarantee. When you buy the contract, the company agrees up front to a certain monthly payment. For example, you might buy a contract for $2,500 per month for the rest of your life beginning in retirement.
A fixed-index annuity is less determined. These contracts guarantee payment, but the amount is not static. Instead, the payments are based on the performance of an underlying index such as the S&P 500 or the Russell 2000. You cannot lose the underlying principal in your contract, and most will come with a guaranteed minimum monthly payment. Otherwise, your income from a fixed-index annuity will increase or decrease based on the performance of its index.
This makes fixed-index annuities a risk/reward tradeoff. If the index does well, this product can pay significantly more than fixed-income annuities, and can even act as a hedge against inflation. If the underlying index does poorly, however, you can potentially make much less money in the long run. This risk is significantly mitigated if you invest in a mainstream index like the S&P 500, but is not trivial if you invest in a higher-risk field.
The Key To Fixed-Index Annuities Is Proper Use
Risk and reward is a very delicate balance in retirement. On the one hand, you want your money to keep growing during these years. On the other hand, you don’t have new income to replace losses, so you want your money to remain safe.
Recently, Morningstar examined where fixed-index annuities fall in that balance. They compared the overall performance of an FIA with a guaranteed lifetime withdrawal benefit rider (GLWB) against standard fixed-income annuities and portfolio investments.
“Overall,” wrote analyst Spencer Look, “I found that FIAs with a GLWB improve projected retirement outcomes, but only if they are used properly.” Specifically, this product can result in stronger payments, fewer shortfalls and more money left over in your estate for the right investor.
But what constitutes proper use? Morningstar found two critical elements:
1. Early Investment
More than anything else, Look found that investors need to buy their FIA at least 10 years before they begin to make withdrawals. For a typical retiree, this means investing by or before age 55.
Why? The annuity needs time to grow. The more time the index has for cumulative growth, the more it will pay. Investors who need income more quickly than this typically see better results with single premium immediate annuities, meaning a fixed-income annuity that you purchase with a lump-sum upfront.
2. Lifetime Investment
This asset also is best for retirees who will hold it throughout their lives.
Exiting an annuity early is known as “lapsing.” When that happens, you collect back the money you put in (often minus a penalty fee) and the contract stops making payments.
Much of the reason to buy this product is that it makes payments for the rest of your life. Over those years and decades, Morningstar found that you will often make more money with an FIA than if you had invested in a fixed-income annuity or a simple stock portfolio.
But if you exit early, you miss out on those future gains. In this case, you often make less money overall than if you had invested in a lump-sum annuity or a stock portfolio.
Longevity Risk Protection
In particular, Morningstar found that a fixed-index annuity can help protect people from running out of money in retirement. “This is because,” wrote Look in his analysis, “an FIA with a GLWB is an insurance product that mitigates against market risk and longevity risk.”
Retirement savers who put their money into portfolios, such as stocks, bonds or index funds, can often get stronger growth than with more careful products like an annuity. But that money is finite, so they risk running out of it.
A fixed-index annuity offers a best-of-both-worlds approach. While FIAs don’t give the full return of their underlying index, they do tend to post stronger returns than a standard fixed-income annuity. Yet, they also come with lifetime payments and a minimum benefit guarantee, mitigating the risk of running out of cash in old age.
Bottom Line
Based on Morningstar’s analysis, investors who are looking for a lifetime retirement product should consider fixed-index annuities. They can offer a strong middle ground between the lower-return/higher-security of a fixed-income annuity and the higher-return/lower-security of a portfolio, but only if you use them correctly. Exiting the contract early can decrease or eliminate the benefits altogether.
Annuity Investing Tips
Annuities can be a strong product for the right investor, but they can often seem complicated. Don’t sweat it. With our step-by-step guide, you can learn the fundamentals of annuities so you can feel more confident about these financial products.
A financial advisor can help you build a comprehensive retirement plan. Finding a financial advisor doesn’t have to be hard. SmartAsset’s free tool matches you with up to three vetted financial advisors who serve your area, and you can have a free introductory call with your advisor matches to decide which one you feel is right for you. If you’re ready to find an advisor who can help you achieve your financial goals, get started now.
Eric Reed
Eric Reed is a freelance journalist who specializes in economics, policy and global issues, with substantial coverage of finance and personal finance. He has contributed to outlets including The Street, CNBC, Glassdoor and Consumer Reports. Eric’s work focuses on the human impact of abstract issues, emphasizing analytical journalism that helps readers more fully understand their world and their money. He has reported from more than a dozen countries, with datelines that include Sao Paolo, Brazil; Phnom Penh, Cambodia; and Athens, Greece. A former attorney, before becoming a journalist Eric worked in securities litigation and white collar criminal defense with a pro bono specialty in human trafficking issues. He graduated from the University of Michigan Law School and can be found any given Saturday in the fall cheering on his Wolverines.
Representatives Donald Norcross (D-NJ) and Tim Walberg (R-MI) have introduced a bill in Congress to allow the default inclusion of annuities in 401(k) plans. If signed into law, it would functionally raise the profile of annuities, allowing individuals to hold large investments in this asset class based on the overall contributions to their 401(k) plans. Here’s what you should know about the bill and whether it’s an option to consider.
Consider working with a financial advisor as you plan out your retirement.
What the Bill Would Do
Currently entitled a bill “[t]o amend the Employee Retirement Income Security Act of 1974 to permit default investment arrangements in annuities, and for other purposes,” it is an updated version of a substantially similar bill from 2022 known as the Lifetime Income For Employees (LIFE) Act. If passed, it would allow employers to include annuities as a default investment option in employer-sponsored retirement plans such as 401(k)s.
Specifically, the bill would classify a certain type of annuity contract as a QDIA, or “qualified defined investment alternative.” In practical terms, this means that employer-sponsored retirement plans could automatically invest a participant’s money in a qualified annuity contract as well as more well-known assets like a stock portfolio. This would expand on steps already taken in last year’s SECURE 2.0 Act, which increased the overall footprint that annuities can have in a retirement portfolio by raising the cap on how much individuals can contribute to annuities with their tax-advantaged retirement accounts.
How This Bill Would Work
This bill limits plan contributions to 50%. This means that, if an employer does choose an annuity contract as their 401(k) plan’s default option, the plan can only invest up to half of a participant’s contributions in that contract. The rest must be invested in other assets such as stocks, bonds and funds. This is meant to ensure diversification in a participant’s portfolio.
Plan participants also must be allowed to opt out of the annuity contract within six months of being opted in, and the plan must explain their investment alternatives. This would apply both to new enrollees, such as a new hire, and to plan changes, such as if the employer restructures the company’s retirement plan in favor of annuities. In either case, each employee will have 180 days in which they can withdraw from the annuity without fees, penalties or any other charges. After that window, the plan can include delays and even surrender penalties if an employee chooses to withdraw from annuity investments.
This opt-out provision is where the updated LIFE Act particularly mirrors SECURE 2.0. That law allows employers to make retirement plan participation the default, giving employees the option to opt out of making contributions if they choose. That changed the current system, in which employees are left out of workplace retirement plans by default and must opt-in. Finance experts have found that opt-out systems increase participation substantially, as employees are much more likely to stay in a plan than they are to seek out participation.
The newly introduced bill would expand on that, allowing employers to automatically enroll their workers in a retirement plan that uses annuities as a default investment, with those participants then given the option to select another investment or stop contributing to the plan as a whole.
Pros and Cons The Bill
If this bill passes, individuals should make sure to carefully consider the potential benefits and drawbacks of annuity investments. The main benefit to annuity investments is its certainty. A standard lifetime annuity is an insurance policy that guarantees fixed payments, typically issued every month, starting in retirement and lasting for the rest of the participant’s life. As a result, it is not subject to the vagaries of market volatility, and it allows for confident financial planning. Participants know what they will receive, when they will receive it and for how long.
Annuities have their risks, though. In particular, they tend to post lower returns than the market at large, meaning that investors usually get a lower return on investment off an annuity contract than an S&P 500 index fund. They can also be fairly expensive, often charging high administrative fees. And, of course, there is always the edge-case risk that the company issuing the annuity contract might go out of business, forcing a risky question of who will hold up their end of the bargain in your retirement.
What’s more, despite its name, the updated LIFE Act does not require employers to select a lifetime annuity. Per the legislative text of the 2023 bill, the selected contract must make payments “for a fixed term or for the remainder of the life of the participant [and spouses or beneficiaries].” Retirement savers should review any plan carefully to make sure that the annuity their employer selects is a lifetime asset, or at least one with appropriate duration.
Annuities can be an excellent retirement vehicle, but make sure they meet your long term goals and needs.
Bottom Line
Recently proposed legislation would allow employers to use annuity plans as a default investment in 401(k) and other employer-sponsored retirement accounts. The goal is to create a functional system of private pension accounts for workers. Whether it makes sense for you depends on the specific terms of your 401(k) and what your particular retirement needs are.
Retirement Planning Tips
A financial advisor can help you build a comprehensive retirement plan. Finding a financial advisor doesn’t have to be hard. SmartAsset’s free tool matches you with up to three vetted financial advisors who serve your area, and you can have a free introductory call with your advisor matches to decide which one you feel is right for you. If you’re ready to find an advisor who can help you achieve your financial goals, get started now.
Are annuities the right investment for you? If your employer is going to start making this hybrid pension product the default choice in your 401(k), it might be time to learn all about how this investment class works and whether it’s a good fit for your plans.
Eric Reed
Eric Reed is a freelance journalist who specializes in economics, policy and global issues, with substantial coverage of finance and personal finance. He has contributed to outlets including The Street, CNBC, Glassdoor and Consumer Reports. Eric’s work focuses on the human impact of abstract issues, emphasizing analytical journalism that helps readers more fully understand their world and their money. He has reported from more than a dozen countries, with datelines that include Sao Paolo, Brazil; Phnom Penh, Cambodia; and Athens, Greece. A former attorney, before becoming a journalist Eric worked in securities litigation and white collar criminal defense with a pro bono specialty in human trafficking issues. He graduated from the University of Michigan Law School and can be found any given Saturday in the fall cheering on his Wolverines.
Since the mid-1990s, inflation has stayed very close to the Federal Reserve’s benchmark of 2% per year, often dipping much lower than that. The upshot has been a long run in which prices have changed little from year to year, with the noticeable exception of an 8% overall jump in 2022. Fortunately, current inflation has largely stabilized and, while still high compared with recent years and the Federal Reserve’s target rate, is back within overall historic norms. All told this has created an environment in which consumers don’t usually think about changing prices all that often.
For retirees, on the other hand, the picture is very different. They have to think in terms of years and decades. For them, inflation is a very powerful force. As prices rise decade over decade it can meaningfully eat away at your retirement savings unless you have prepared in advance. A financial advisor can help you better protect your retirement savings from the effects of inflation and plan for the future.
What Is Inflation?
Inflation measures changing prices in the marketplace. Specifically, it measures how prices increase for the same goods and services over time. For example, when the price of milk increases from $2.85 per gallon to $4.04 per gallon, that’s inflation. The opposite effect, when prices fall, is known as deflation and it is counterintuitively a borderline disaster for most households and consumers.
There are as many ways to measure inflation as there are economists, but the standard measure is known as the Consumer Price Index or CPI. It measures how prices change on an annual basis for a representative group of goods and services across the United States, omitting energy prices and agricultural products. These last two, while essential to household spending, are left out of the inflation statistics because they’re extremely vulnerable to geopolitical and natural events, respectively.
Economists consider a little bit of inflation beneficial. It shows that the economy is producing at capacity, which encourages growth. This is why the Federal Reserve has its inflation benchmark set at 2%, not zero.
For most households, inflation is reflected in both costs and incomes. As prices rise, employers typically increase pay scales to compensate. This is why economists treat inflation as such an emergency because it can create a feedback loop of rising incomes and prices with no natural stopping point. This also makes inflation, under ordinary circumstances, a minor issue. Most households don’t notice small price adjustments over short time frames and pay increases help them keep up over the long run.
Costs of Living in Retirement
In retirement, your basic math is simple: money in vs. money out. If your retirement accounts can generate more money than you spend, you can afford to retire.
The problem with inflation is that it gradually changes the math in this formula. Each year, your “money out” gets a little bit more expensive. Up front, it’s hard to notice. If a gallon of milk goes up by $0.02, that doesn’t stand out. But in the aggregate, these changes add up. For example, say that your costs come to $5,000 in spending per month. With 2% inflation, the next year you would spend $5,100 per month. The year after that, $5,202. The year after that, $5,306.
Even with just a 2% annual price increase, within just three years of retirement, you’re spending $300 more per month than you initially budgeted. And since retirement lasts for decades, inflation has plenty of time to set in.
Some Areas Are Particularly Vulnerable
One of the biggest things to remember about inflation is that it often hits some areas harder than others. For example, a disproportionate and large amount of 2022’s high inflation came courtesy of astronomical prices in the used and rental car markets. For retirees, this can be a double-edged sword depending on how you have structured your finances. You might be safe from some of the worst sectors or you might be particularly exposed.
A few costs of living that are particularly vulnerable to inflation and price swings are:
Housing: In recent decades the cost of housing has risen sharply. If you own a home, whether it’s paid off or on a fixed mortgage, you’re safe from these rising costs. If you rent, particularly in a big city, this will be a huge cost sector as prices go up year-over-year.
Energy and food: These two sectors are omitted from the core inflation measure because they’re extremely volatile. However, that volatility tends to make them particularly sensitive to inflation across the marketplace at large. That’s a particularly big problem because, ultimately, utilities and groceries make up the bulk of most households’ bottom line and just because they’re not in the BLS’ official report doesn’t mean you won’t feel the squeeze.
Imports: Historically, imported goods tend to experience inflation earlier and sooner than most other products in the marketplace. If you buy or rely on products brought in from overseas, this will show up in your budget.
Travel: If you want to travel in your retirement, inflation can make that more expensive. Airfare often jumps during periods of inflation and if you are leaving the country a weaker dollar will make your trip that much more expensive.
Savings and Social Security
Most retirees rely on three sources of income for the “money in” side of their retirement: savings, investments and Social Security. Let’s take a look at each.
Savings: Savings generally refers to the money you have in cash or cash-like assets. Basically, this refers to the money you have in banking products like checking, savings and certificates of deposit. The appeal of keeping money in savings is a certainty. Just putting everything into a savings account is about the lowest-risk option short of buying Treasury bonds. However, it also exposes your money to near-constant erosion. This feels like the safe option, but keeping all your money in the bank is a good way to effectively lost it little by little rather than all at once.
Low-Risk Investments: Low-risk investments tend to include assets like bonds and annuities. These are the middle ground between growth and safety. You want some growth but are willing to sacrifice potential gains for the confidence that you’ll get your money back. These are a mixed bag when it comes to long-term inflation management. The biggest problem is that low-risk investments often define their gains up-front.
Higher-Reward Investments: The most common footprint for a high-reward investment in stocks is either buying shares of an individual company or buying into industry or index funds. These are the growth end of the risk-reward balance. You will get the strongest returns but with the most risk. High-reward investments are the best way to manage inflation in the long run, since strong returns are the best way to keep your investments current with rising prices.
Social Security: Finally, most retiree households depend on Social Security to one degree or another. When it comes to inflation, this is the good news. Each year the Social Security Administration issues its annual COLA or “Cost of Living Adjustment.” This increases the monthly benefits issued to all recipients based on the government’s benchmark inflation rate. The COLA is based on national inflation figures. When prices go up, they tend to increase more in some areas than in others.
How To Address Inflation
So this is what inflation does. It tends to erode the value of low-growth assets and income as prices increase faster than the value of investments. Here are two things you can do to address inflation.
1. Manage Investments
The best way to address inflation in your retirement is to plan for it upfront. Specifically, build your retirement portfolio with inflation in mind. This can mean a few different things, such as investing in:
All of these assets tend to be sensitive to inflation. Stocks and REITs tend to grow with the value of the market, as companies increase their prices to keep pace with inflation. Short-term bonds, meanwhile, mature every few years, allowing you to reinvest in new assets that may better reflect current pricing. And some annuities offer an inflation-adjusted payment schedule, allowing you to plan for long-term growth in your returns.
2. Manage Costs
The biggest issue here is housing. The cost of housing has soared in recent decades and that fever shows no serious signs of breaking. This is most prominent in the rental market. Buying a home before you enter retirement, even if that means downsizing from your apartment, can help you secure your housing costs going forward.
If you own a paid-off home, you won’t have to plan for housing payments. If you start a mortgage prior to retirement, you will at least have fixed rather than escalating costs. Beyond that, prepare a good cash reserve for the wide fluctuations common to the energy and food sectors. These two areas are most prone to volatile price swings, both up and down, during periods of inflation.
The Bottom Line
Inflation can significantly eat away at your retirement savings. It’s important to build a retirement plan that anticipates enough growth to offset this, otherwise, you can see your quality of life decline as your bills get more expensive year after year. It’s important to take the necessary steps to protect your retirement savings.
Inflation Management Tips
The other best way to make plans is with good, solid help. A financial advisor can help you determine how inflation will impact your ability to save what you will need for retirement. Finding a financial advisor doesn’t have to be hard. SmartAsset’s free tool matches you with up to three vetted financial advisors who serve your area, and you can have a free introductory call with your advisor matches to decide which one you feel is right for you. If you’re ready to find an advisor who can help you achieve your financial goals, get started now.
The best way to make plans is with hard, solid numbers. Run your retirement plans through our inflation calculator to get a sense of whether you’re on the right track.
Eric Reed
Eric Reed is a freelance journalist who specializes in economics, policy and global issues, with substantial coverage of finance and personal finance. He has contributed to outlets including The Street, CNBC, Glassdoor and Consumer Reports. Eric’s work focuses on the human impact of abstract issues, emphasizing analytical journalism that helps readers more fully understand their world and their money. He has reported from more than a dozen countries, with datelines that include Sao Paolo, Brazil; Phnom Penh, Cambodia; and Athens, Greece. A former attorney, before becoming a journalist Eric worked in securities litigation and white collar criminal defense with a pro bono specialty in human trafficking issues. He graduated from the University of Michigan Law School and can be found any given Saturday in the fall cheering on his Wolverines.
Northwestern Mutual dedicates $3 million to help residents in Milwaukee’s underserved communities achieve homeowner status The company and its local partners are helping Milwaukee residents secure financial stability through affordable housing efforts MILWAUKEE, June 20, 2023 /PRNewswire/ — Despite gains in education and earnings, the racial wealth gap remains a deep issue in America. According … [Read more…]
As I mentioned in my missive from two weeks ago about the power of dividend reinvestment, I attended the Morningstar Investment Conference earlier this summer and heard from all kinds of mutual fund managers and investment professionals. However, the presentation that had the biggest impact on me — which is to say, it depressed the bejeezers out of me — came from Harvard professor David Laibson. His main point: From age 53 or so on, our cognitive skills begin to decline to the point where approximately half of people in their 80s suffer from some kind of impairment that could lead to significant financial mistakes. Recently, I grabbed a box of tissues and interviewed Dr. Laibson.
Robert Brokamp We all expect to slow down as we get older. However, your research indicates that the slowdown starts sooner than most people expect.
David Laibson There are two types of intelligence that are particularly important.
One is crystallized intelligence, which is accumulated through experience — think of wisdom, intuition, your familiarity with a set of problems that you have encountered many times. Crystallized intelligence rises over the entire life course; we keep getting better and better, but the rate of progress diminishes. We get better quickly as a young person, and then as we get older, the progress gets slower. Eventually we plateau, and maybe very late in life it declines. But mostly, it’s progress.
The other category is fluid intelligence, which is the capacity to confront a new problem and handle it very well. Fluid intelligence appears to peak around age 20 and then declines. When you put those two together, it looks as if we make the best decisions in mid-life — in our analysis, around age 53. Along with Sumit Agarwel, John Driscoll, and Xavier Gabaix, we find that the accumulation of wisdom and experience swamps the decline in fluid intelligence early in life. We are just getting better, even though our ability to solve novel problems is going down.
But around age 53, there is not a lot of additional crystallized intelligence year to year, while there is ongoing decline in fluid intelligence — so the decline in fluid intelligence ends up dominating. We peak around 53 and then start declining. That doesn’t mean that we fall off a cliff at 53. But as you get out to the 70s and then particularly the 80s and 90s, the decline becomes sharper and stronger. Decision-making in the 80s and 90s is significantly impaired for many older adults.
Robert Brokamp Is there anything people can do about it — exercise, a good diet, anything like that?
David Laibson Well, no, there is not a lot. Exercise and diet will reduce the odds of cognitive impairment a little bit, but those effects are modest. And so I think we shouldn’t be focused on avoiding the possibility of cognitive impairment. We have to recognize that no matter what we do, the risks are significant and hence we have to prepare for that possibility rather than naively thinking we can somehow avoid that outcome.
Robert Brokamp At what age should people start factoring this into their financial and estate plans?
David Laibson The second you form a family — even if you have modest assets — you should begin to prepare for this possibility. I say that because it is not just dementia that can be a problem. You can have a stroke in your 40s and not be in a position to make great decisions; you can get into a car accident and have a head injury. So the earlier, the better.
On the other hand, risks don’t really pile up until the 70s, so if someone told me, “Look, I am just not too worried about these issues; I am 45 years old,” I would say, “I think you are making a mistake,” but I wouldn’t get too agitated. For someone in their mid-60s, that is really when further delay is becoming irresponsible. By the time someone is in their mid-60s, there is no excuse for delaying the acquisition of the key legal documents that enable you to prepare for these transitions.
Those documents should include durable power of attorney, and would include — if you have significant assets — a living revocable trust as a way of protecting your assets, and would include, of course, a will. Then there are two health-care documents that are very important. There is a health-care proxy, which is the assignment of some person or set of people to make health-care decisions for you if you are incapacitated, and there is also a living will, which is a set of instructions to those individuals that expresses your preferences about the nature of medical care. If you are in an ICU, for example, what extreme measures should or should not be taken to prolong your life? Those are the five documents I strongly recommend that anyone who is part of a family have. By age 65, it is critical.
Robert Brokamp One of the solutions you propose is for older investors to buy income annuities, which provide income for as long as you live.
David Laibson An annuity is such a wonderful way of addressing a lot of the risks that older adults face. Let me go through the benefits of an annuity, and then I want to acknowledge that most people don’t want annuities, despite these benefits, so we can talk about that psychological resistance.
The first big benefit is that it addresses longevity risk — in other words, the risk that you might outlive your assets. Here we are at age 70; we could live five years or 30 years or even 40 years, so that is a big risk. If you live a very long time, and you are spending down your wealth, you face the possibility that you will run out. An annuity eliminates that risk, because the annuity pays out as long as you survive. If it is a joint annuity — owned by you and your spouse — the annuity pays out until the second member of the unit dies. So it is a great way of insuring against the possibility of living too long. That is one benefit.
Another benefit of an annuity is that it is very, very simple. The check comes every month in the mail. There is no need to worry about asset allocation. There is no need to worry about how much to spend, how much to save. The check comes, and that is your budget for the month. The chance of having some nasty person rip you off by getting you to invest in their harebrained scheme is reduced, because you don’t have your personal wealth sitting in a checking account. Instead, the annuity company, in essence, is holding your personal wealth for you. So in all these ways, the annuity is protective. It protects you against longevity risk, it simplifies your decision making, and it protects you from bad actors and from mischief. Terrific.
So why don’t people have annuities? Well, annuities, of course, have a bad name for many reasons. First of all, people perceive them as being complicated, and in some ways they are complicated legal documents, complicated financial contracts — particularly, a lot of the modern annuities have a lot of special clauses. People worry about fees with annuities, and it is true that the majority of annuity products are excessively expensive and not a good deal. And people like to have a sense of control; annuities mean passing control over to somebody else — in this case, the insurance company.
Now, I don’t want to dictate to people and say, “You have to have an annuity.” I hope that people can weigh the pros and cons, particularly while they are still highly cognitively functioning in their 60s, and figure out what is right for them. I do think people should think seriously about annuities and look hard for an insurance company that offers highly competitive rates if they are going to proceed with an annuity. But if at the end of the day, you insist on controlling your assets, and you want full liquidity, then an annuity is not for you.
The one thing I would consider is a partial annuity. You still have some significant fraction of your wealth in your own hands. You can decide what to do with it, and it is there as a bequest in the event of your death. You can spend a lot or a little each year, you have flexibility. Then take some other fraction of your wealth and annuitize that. Now, we have the best of both worlds: You have got some control, but you also have a nice amount of longevity insurance in the form of a significant fraction of your wealth annuitized.
Robert Brokamp It also seems that you don’t only have to worry and plan for your own possible cognitive decline but also for that of your spouse and maybe older relatives. Any advice on how to make protecting against age-induced financial mistakes a family affair? How do you broach that topic with older parents or other relatives who are getting up there in age?
David Laibson I think the key thing is that people recognize that when we recommend these things, we are not recommending it because a particular parent is showing some kind of cognitive impairment; it is a recommendation that is universal. All people — regardless of their vitality, regardless of their cognitive function — should execute the five documents that I described a moment ago. It is just how responsible people behave, and so I think the messaging has to be, “It is not about you, Mom, or you, Dad. It is not any judgment that anyone is making about your mind or your thinking, it is just the normal course of affairs for everyone who has a family, and anyone who has an estate.”
Robert Brokamp How do you respond to someone who says, “Well, Berkshire Hathaway Chairman Warren Buffett is 80, and Vice Chairman Charlie Munger is 87, and they are still beating the market”?
David Laibson It is not that everyone’s fate is to have dementia at age 85; no one is saying that. What is being said is that the frequency of dementia increases with age to the point where one in five individuals in their 80s has dementia, and one in three individuals in their 80s has cognitive impairments that fall short of dementia. Put all that together, about half of people in their 80s have significant cognitive impairment. So half the population is going to be in a good position to make decisions and half is not. The problem is that you don’t know which half you’re going to fall into.