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Charlie Gipple, CFP, CLU, ChFC

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Charlie Gipple, CFP®, CLU®, ChFC®, is the owner of CG Financial Group, one of the fastest growing annuity, life, and long term care IMOs in the industry. Gipple’s passion is to fill the educational void left by the reduction of available training and prospecting programs that exist for agents today. Gipple is personally involved with guiding and mentoring CG Financial Group agents in areas such as conducting seminars, advanced sales concepts, case design, or even joint sales meetings. Gipple believes that agents don’t need “product pitching,” they need mentorship, technology, and somebody to pick up the phone… Gipple can be reached by phone at 515-986-3065. Email: cgipple@cgfinancialgroupllc.com.

Whole Life Flexibility And Case Design (Part 2 Of 3)

Charlie Gipple, CFP, CLU, ChFC
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Whole Life Flexibility And Case Design (Part 2 Of 3)

In part one of the series, and in last month’s edition, we discussed how it is perceived that whole life insurance is very rigid because the structure of the base policy “generally“ requires the premium be paid for the duration that the product was designed for. But then I countered that argument by discussing the various nonforfeiture provisions, the most popular one being “reduced paid-up insurance,” at least for the cash accumulation sales. For instance, one of my favorite products is a “Pay to age-75” product. However, I will often do a “seven pay“ design where at the end of that seventh year we do a “reduced paid up policy” where no other premium is required. You can also have dividends pay premiums if dividends are robust enough. So again, the thought that whole life requires premium to be paid is false.

In this article I would like to discuss very briefly the various dividend options and have a more in-depth conversation around the fifth dividend option, Paid Up Additions. In article three we will discuss term riders for cash accumulation sales and then bring it all to a conclusion with a case design example.

First, what is a dividend in a whole life policy?
This is cash that is returned to the policyholder of a participating whole life policy whereas the policy holder has several options on what to do with that cash. The dividends are usually paid to the policyholder on an annual basis. Dividends represent the carrier having better experience than what was priced into the guaranteed components of the product. The three areas that can “outperform” the guaranteed components in the policy that generally make up a dividend payment are as follows: 1. Investment management. 2. Expense management. 3. Mortality experience.

Dividends are generally not guaranteed and therefore can generally be found in the non-guaranteed column of the whole life illustration. As said in the previous paragraph, a whole life policy has guaranteed provisions, but can also have non-guaranteed provisions like dividend assumptions. (Note: The guaranteed provisions in whole life are usually more robust than the guarantees in IUL. Hence, one of the reasons that one may prefer whole life over IUL.)

Dividend options:

  1. Cash: This is quite simply where the insurance company sends the client the check representing the dividend payment. Dividend payments are generally tax-free as long as they have not exceeded the cost basis in the policy.
  2. Premium reductions: It is possible that your policy gets to a point to where the dividends can pay the premium going forward. That would be while utilizing this option.
  3. Accumulate at interest: This is where your dividend stays with the insurance company and accumulates at a rate that the insurance company determines.
  4. Reduce an outstanding loan: If you have a loan against the policy, you can use the dividends to pay down all or a portion of that outstanding loan.
  5. Paid up additions: The big one. This is where we will spend a good chunk of the remaining article because the paid-up additions dividend option is what I illustrate about 99 percent of the time for our agents.

Paid up additions:
Paid up additions are not just a dividend option. This is also a rider you can choose where you can add premium above and beyond the base policy. That additional premium can purchase paid up additions. Usually, this dividend option along with allocating a large chunk of one’s premium payments to the PUA rider is what is done in high cash value cases. We will discuss more about product design in the third (of three) article.

Paid up additions are additional “slivers” of paid-up whole life insurance coverage on top of what you already have with the base policy. This is why when you look at the non-guaranteed side of the whole life illustration you will see the death benefit increasing year-by-year as the dividends purchase PUAs over time. Conversely, the guaranteed death benefit column does not increase. This is because the guaranteed side of the ledger typically does not include dividend payments. Alas, dividend payments are usually not guaranteed.

Although we discussed that PUAs increase the death benefit over time (without evidence of insurability by the way), that is not the main reason people love PUAs! They love PUAs because PUAs are like miniature single premium whole life policies. What that means is, the single premium design of PUAs beef up the overall cash value in the policy! Remember from our first article, the PUA lives by the same rules as the base policy whereas the cash value has to equal the death benefit by age 121 (usually). So, common sense would tell us that if we pay just one premium (PUA), that one premium had better start out as a higher cash value number than the “Pay to age 75” base policy. Afterall, the “Pay to age 75” base policy will have multiple premiums going in over time. As a matter of fact, the cash value as a percent of premium of a PUA payment is often 95 percent or so, depending on the client. Versus the base policy, which can commonly only have 15-25 percent of cash value in that first year relative to premium.

So then, can we just buy all PUAs and have the entire policy have immediate 95 percent of premium as cash value? No!

OK then, what percentage of our premium can we put into PUAs so that we have a cash value Machine? This will be our case study for the next article.

A Technical Way Of Looking At GLWBs When Rates Decrease

Charlie Gipple, CFP, CLU, ChFC
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A Technical Way Of Looking At GLWBs When Rates Decrease

In addition to running an independent marketing organization where I help four hundred agents with their annuities, life, and long term care business, I also have a small group of high-net-worth clients I work with. Here, I help them with their retirement planning, estate planning, tax planning, and long term care planning. This is also where I work with securities and “assets under management” as an investment advisor. In doing so, I always pay close attention to where the current interest rates are as well as what I believe the secular trend will be.

Obviously, I am not alone here as there are multi-trillion-dollar money managers that analyze interest rates in order to buy bonds while yields are high, especially if they expect yields to drop in the future (to oversimplify). Why do they do this? Because of the inverse relationship between prevailing yields and the market value of the bond that you currently hold. As many of you know, if one holds a bond today that offers a high interest rate, if interest rates drop tomorrow, that bond would have likely increased in value leading to more wealth for the current bondholder. Bonds 101.

I mention all of this because, although somewhat theoretical when applied to index annuities and GLWBs (guaranteed lifetime withdrawal benefits), I want to share with you what goes on inside of my head when I think of the similar scenario of having an indexed annuity with a lifetime withdrawal benefit rider while interest rates decrease.

In the June edition I typed an article entitled Indexed Annuities: My Paranoia Of Product Extinction where I discussed that annuities with guaranteed lifetime withdrawal benefits are priced extremely generous today and agents and consumers need to take advantage of the current offerings while they exist. Sure enough, since then we have witnessed a few major players decreasing their payout factors on those guaranteed lifetime withdrawal benefits, for the exact reasons I prognosticate in the article. (Note: if one understands the actuarial mechanics behind these products, they can usually predict the moves that the carriers will make with their product pricing, certainly much better than how one can predict the stock market.)

Although somewhat theoretical, let’s draw a link between how bonds increase in value when rates drop and how you could “intrinsically” increase the value of a client’s retirement portfolio by putting them in annuities today with the payout factors decreasing down the road. The last few paragraphs of this article will be me giving you an example of the increased “intrinsic” wealth that your clients, who are locked into a high GLWB today, will get once the payout factors decrease as a few carriers have done.

The technical reason that bonds increase in value as interest rates increase and decrease is because of this: The market value is the cash flow that you will receive from that security discounted back to today’s date by a “discount rate.” The discount interest rate is basically just the new rate in the new environment that we are in.

Let’s use an example: Yesterday, you put $100,000 into a bond that will give you six percent ($6,000 per year) in interest on your $100,0000 investment over the next 10 years, then return your $100,000 of principal back to you at the end. Today, what is the “market value” of that bond? The answer is, it depends. If prevailing rates are still six percent today, then it does not take a financial calculator to tell you that if you discount back a future benefit of $6,000 per year, plus $100,000 at the end, then the “market value” is $100,000 today. This is assuming the discount rate/current rate is based on six percent.

However, let’s assume that interest rates decreased to 5.5 percent since “yesterday,” when you bought the bond. Now what is the market value of your bond? When you discount back that $6,000 per year income plus the $100,000 at the end by the 5.5 percent rate, $103,768.81 is the current “market value” of your bond! We are now $3,768.81 wealthier because we owned an instrument that gives us the same fixed income, even while interest rates dropped! Inflation/costs of living probably dropped as well even though you had the same $6,000 per year coming in to buy those goods and services! Of course your bond is more valuable then! (Note: Technically, the bonds increase and decrease in value based on supply and demand, but it is this bond pricing formula that is the “guiding hand” of that supply/demand.)

Now, let’s say that you are a 55-year-old couple with $100,000 and you put your money in an indexed annuity that will pay you a guaranteed lifetime payout of $15,155 per year, starting at age 65. Again, on both of your lives. Yes, this product exists right now! How long will that income stream of $15,155 come in? Statistics show that age 92 is the life expectancy of one person out of a couple. I would actually argue higher because of “adverse selection”—the notion that healthier than average people buy longevity insurance—but I digress.

When you look at the cash flow analysis, you will find that the internal rate of return on this cash flow going from age 65 to age 92 is around 6.6 percent. The internal rate of return can be defined as, “the amount of return an investment would have to return on an annual basis in order to generate that level of income.”

So, our $100,000 that we used to buy this annuity “yesterday” is going to effectively yield us 6.6 percent, based on the last person living to age 92. However, what if interest rates are such that the carrier has to drop the payouts where the new internal rate of return on new policies for the same scenario is not 6.60 percent, but rather 6.1 percent? Hence, a 50-bps decrease. What would theoretically be the market value of the future income stream on that client’s annuity? $109,646. Our annuity is now 10 percent more valuable just because interest rates decreased. By the way, what I just explained is also how market value adjustments work in increasing and decreasing rate environments.

Now, I am not suggesting that the client is techincally $9,646 richer on his/her personal balance sheet because interest rates have decreased. What I am saying is, this is a technical way to look at the value of the future stream of income they will receive. This is the lens in which the “technicians” on Wall Street view the value of fixed income assets. If there was a secondary market for GLWBs, this math is what would be utilized.

Furthermore, this is not all theoretical BS, because if you think of interest rates lowering, it is often because the costs of goods and services have subsided (lower inflation). This means that you technically can purchase more with your $15,155 payment stream than you could if rates otherwise remained the same. Hence, your annuity is more valuable.

However, for folks purchasing the annuities after rates have decreased, needless to say, they will not have a $15,155 payment stream and they will not see their “theoretical wealth” increase like those folks that got in while the getting was good!

Update: Annuities Versus The Four Percent Rule Of Thumb

Charlie Gipple, CFP, CLU, ChFC
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Update: Annuities Versus The Four Percent Rule Of Thumb

The following analysis on GLWBs versus the Four Percent Rule has been updated to today’s GLWB offerings.

I recently saw somebody write about how we should not compare annuities to the four percent rule. Although I agree that there needs to be additional disclosures and education in the annuity part of the conversation, I disagree with not comparing the two.

Re-Anchor Clients in Reality, Not Fairy Dust
I believe that consumers tend to “anchor” their retirement income expectations on the wrong thing and therefore should be “re-anchored” in reality. For instance, consumers should be educated on the fact that William Bengen’s study in 1994 showed that in order to sustain a stock/bond retirement portfolio for 30+ years in retirement, the consumer should take out no more than four percent of their retirement account balance that first year in retirement, adjusted each year thereafter for inflation. Consumers should also be aware of the new updated studies that show “rules of thumb” of 2.3-2.8 percent. (Note: When using these comparisons versus annuities, it is important to discuss that annuities generally do not have “inflation adjustments” as the four percent rule incorporates. More on that in a bit.)

This “re-anchoring” is important because many consumers know that the S&P 500 has gone up double digits on average for the last century and therefore overestimate what withdrawal rate they should utilize. They have seen the glorification of the “stock and bond” markets and have likely seen the mountain charts like the Ibbotson SBBI Chart. You know what charts I am referring to; those that show that the stock market has done double digit returns forever and that their $1 invested back when Adam met Eve would be worth enough to purchase their own private island today.

Thus, if a consumer has in their brain that stocks and bonds have always performed seven percent, eight percent, 10 percent, 12 percent, then they will tend to believe that their retirement withdrawal rate is beyond the four percent that the research shows. Even if a consumer has heard of the four percent withdrawal rule, they may have not had the math laid out for them yet that is specific to their situation. It is important to explain to those that love their stocks and bonds—as I do—that even though the S&P 500 could average 10 percent over the coming years, it does not mean they will not run out of money by taking only four percent of the retirement value from their stock and bond portfolios! How is this possible? Because of the sequence of returns risk that the stock portion can subject the client to and the low interest rates (still) that the bond portion can subject the client to. And because of these two risks (sequence of returns and low rates), a client should not overestimate what their portfolios can do as far as withdrawal rates. If you would like a graphic that helps you explain “sequence of returns risk” to your clients, email me.

To demonstrate my points in the previous paragraphs, I want to cite a study by Charles Schwab. In their 2020 Modern Retirement Survey they asked 2,000 higher net worth pre-retirees and newly-retired retirees about how much money they had saved for retirement and also how much money they expected to take from their retirement portfolios. The answers from the participants were that they had $920,400 in retirement savings (on average), that they planned on spending $135,100 per year from those portfolios (on average), and that they were generally confident in those dollar amounts allowing them to live the retirements they would like.

I would argue that a 14.68 percent withdrawal rate ($135,100 divided By $920,400) defies any retirement research I have seen! Naturally, Schwab then points out that—contrary to these participants’ beliefs—a $920k portfolio will run out in only seven years (obviously not including interest/appreciation). Clearly, these consumers should have the math explained to them. Even if the consumers understand the new “rules of thumb,” they may be experiencing cognitive dissonance that should be addressed by the financial professional. By doing so, you will “re-anchor” their expectations to the new realities of 2.3 percent, 2.8 percent, or four percent withdrawal rates, which will set you up for the annuity conversation that I will discuss.

I am not suggesting an agent go into a big dissertation on these individual studies. I just believe that going over the simplified math—specific to the client’s portfolios—based on these new rules of thumb should be done in order to show the power of annuity GLWBs. Although generous, using the old four percent rule of thumb will suffice in explaining the annuity value proposition. By demonstrating this math to the clients, you will be re-anchoring their expectations to realistic numbers. And only then do I believe they will realize the true power of GLWB riders.

The GLWB Conversation
Here is what my conversation looks like (many times) that I will walk our hypothetical client through.

Let’s say our 63-year-old has $100,000 in a stock and bond portfolio. I start by discussing how this 63-year-old may have the expectation that her $100k grows by five percent or so per year between now and retirement in two years. Well, based on her $110,000 (not including compounding) value at that point, what withdrawal should she take in her first year of retirement? This is where I discuss the four percent withdrawal rule, which usually surprises them because their “anchoring” is off, as we discussed. I also discuss the reasons for the withdrawal rate being only four percent, as we also discussed earlier in this article. But then I will show her $100k growing to $110k in two years at retirement. If the client wants us to assume a 20 percent return over two years, fine! I will do that instead. The math still works.

By the end of the two years, her $100k has grown to $110 k. That is when we figure the first-year withdrawal, which comes out to $4,400. Again, that $4,400 is supposed to increase with inflation, per the four percent rule.

That $4,400 is assuming everything goes correctly. That is, that she gets 10 percent appreciation between now and age 65, and also that the four percent is indeed sustainable over her 30-year retirement.

That is when I will switch to the annuity. On one of the industry’s top annuities/GLWB riders right now, her $100,000 will “rollup” by 10 percent simple interest rate for two years, then that value of $120,000 will have a payout factor of 7.5 percent for a 65-year-old. (Note: Technically this 10 percent rollup is not limited to just two years. It depends on when she activates income, which in our example is two years.) That means that there will be a $9,000 payment starting two years from now, guaranteed for life! That payment will go on forever. This GLWB payment is 105 percent higher than what our four percent withdrawal rule will provide. And you don’t have the “hoping and praying” with the annuity. Usually at this point in the discussion, the responses are in three different areas:

  1. Seems too good to be true! How can the company do that? This is a topic for another article.
  2. What if everybody lives forever? Will the company go out of business? Again, a topic for another article.
  3. But what about inflation? The four percent rule includes inflation, and the annuity does not. Let’s discuss.

Level Annuity Payment Versus Four Percent with inflation
Although I believe we are being generous to the situation by using the four percent rule instead of the more updated and lower rules of thumb, it would be disingenuous to not explain the lack of inflation on the level payout GLWBs. (Note: There are some GLWBs that have increasing income, but let’s leave the conversation to the level income for now.)

This objection about annuities not having inflation included, versus the four percent rule is a reasonable objection, as inflation adjustments can be crucial. As a matter of fact, the “inflation rule of 72” says that a 3.5 percent inflation rate—for example—will chop the purchasing power of a dollar in half in only 20.5 years (72/3.5 = 20.5 years). Meaning that $9,000 would only have the purchasing power of $4,500 in 20.5 years assuming 3.5 percent inflation.

So then what provides the highest “cumulative income,” our GLWB or the four percent rule example? Included is a graph from a spreadsheet I created to show what provides more income—the $9,000 (GLWB) without inflation adjustments or the $4,400 (four percent rule) with inflation adjustments. (Note: For the inflation adjustments, I assumed 3.5 percent.)

As you can see in the chart, the inflation adjusted four percent rule annual income crosses over to where it is more than the $9,000 in the 22nd year! You can see the two lines crossing over. The dollar amounts represented by the lines are in the right axis.

Now, what is more important however is, what is the “cumulative income” from each strategy over a period of 40 years? That is represented by the bars and the left axis labels. As you can see, the Cumulative GLWB Income (Black Bar) stays higher than our cumulative four percent rule all the way through the 30-year retirement. As a matter of fact, it takes approximately 40 years for the four percent rule to catch up to our annuity income on a cumulative basis. In year-40, $364,776 is the cumulative income from the four percent rule at that point in time and $360,000 is the cumulative income from our annuity. So, in this example, only if the client lives beyond age 105 will she have garnered more income from the four percent strategy than our annuity.

Lastly, this analysis is being generous to the four percent rule because we are not incorporating the “time value of money” of the amount of excess GLWB payments we got above and beyond the four percent rule in the early years. Technically, those excess dollars reinvested would equate to even more than what our “cumulative” black bar is actually showing.

Clearly, there are other scenarios that we could run that can benefit or degrade the story on either one of the two solutions. For instance, we could run the four percent rule assuming a much higher return than 10 percent over two years, for example 20 percent. We could have taken into consideration capital gains taxes on the four percent rule of thumb versus income taxes on the annuity. But then we could also apply the “time value of money” to the excess annuity payments on the annuity. We could also use the 2.8 percent withdrawal rule. Or, one could add different inflation rates, etc.

In the end, and with all of this said, the story should be that consumers need to anchor their expectations reasonably and also that annuities have a great place in many consumers’ portfolios with or without inflation.

Whole Life Flexibility And Case Design (Part 1 Of 3)

Charlie Gipple, CFP, CLU, ChFC
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Whole Life Flexibility And Case Design (Part 1 Of 3)

Part 2 and Part 3 will be in following months’ editions.

I always get the question, “Which product do you like best, whole life insurance or indexed universal life insurance?” That’s a lot like asking me which of my two boys is my favorite. Each of them has their own strengths and each of them has their weaknesses. However, my 14-year-old is overly hormonal right now, so I don’t really care for him as of recently. Just a joke!

Anyway, as I have these conversations about IUL versus whole life, something that comes up regularly from the anti-whole-life crowd has to do with the lack of flexibility. That is what they cite over and over again, that whole life is too rigid. However, those folks are oftentimes unaware of what a person can do with the flexibility that is offered by the non-forfeiture provisions, the various dividend options, and the myriad of paid up additions structures that exist. Said another way, if you are a whole life novice that is unaware of these other levers and pulleys, then you certainly would be justified in thinking whole life is very rigid. However, there is much more to the story… For instance, can you “7-pay” a whole life policy that is a “pay to age 75” design? Of course you can. More on this in a bit.

This article is a part of a series that dives into whole life case design and the flexibility that one has when they design a policy. This particular article will largely focus on the nonforfeiture options that whole life policies have that provide flexibility in the premium structure. The following months’ editions will cover the dividend options, term riders, and paid up additions options that further add to the levers and pulleys that go into designing these cases. (Note: For a good cash value design, the nonforfeiture options along with the dividend structure, term blending, and PUA options all work together.)

By the end of this series, you should have a good understanding of how to design a case, or at least an understanding of why your IMO designed the case the way they did.

First off, the basic definition of whole life insurance is a permanent policy with a guaranteed death benefit where the cash value equals the death benefit at age 121. So, in other words, a whole life policy not only guarantees the death benefit but it also guarantees that the cash value equals the death benefit at the end-age121. So, because the insurance company is guaranteeing those two things, then of course the insurance company needs a guarantee that the premium will be paid based on how the actuaries designed the payment duration (10-pay, pay to 65, pay to 100, etc.). This is completely different from universal life where UL is an “unbundled” approach that says as long as there is cash value to support the policy charges you can pay whatever premium you like. Of course, that is a simplified definition as there are various types of universal life.

So, again, to the whole life novice, the previous leaves one believing that whole life is not “flexible” because you are “required” to pay X premium for X number of years on the policy. Well, that would be the case if it were not for the non-forfeiture provisions that are mandated by the insurance regulators.

Non-forfeiture provisions
These are provisions that whole life policies have that ensure that when the owner stops paying premium and cancels the policy that they will likely get a value out of their policy. After all, if they paid premiums for 20 years, they should be able to get something if they surrender the policy. For consumer protection purposes, states require “non-forfeiture provisions” and therefore these provisions are fairly standard and universal.

The four non-forfeiture provisions:

  1. Cash surrender value: This one is simple. One can surrender the policy and get the surrender value in the policy. Beware of taxes if you cash out more than what you paid in premiums!
  2. Extended term insurance: This is where somebody can basically trade the cash value that one would otherwise receive in #1 for a term policy for the same death benefit as the whole life policy, but for a certain duration, or “term.” Of course, the length of term is dependent on how much cash value you are “trading” it for. Hypothetical example: Let’s say a 45-year-old has a whole life policy with $1 million in death benefit and $20,000 in cash value. He does not want to continue to pay the premiums on the whole life policy, so he chooses this non-forfeiture option. The insurance company gives him $1 million of coverage for the next 11 years without him having to pay anymore premiums.
  3. Automatic premium loan: If you come into tough times and cannot pay the premium for that month or year, you can take a loan against the cash value to pay the premium for that month/year. That loan will carry an interest rate that will reduce the cash value and the net death benefit, at least until that loan is paid off. This can be an attractive option for somebody that comes into tough times and needs a reprieve from premium payments.
  4. Reduced paid up insurance: This is where the cash value that has been built up can effectively turn into a single premium paid up policy of a smaller size than the original policy. Hypothetical example: A 62-year-old has been paying premiums for 15 years now on his $1 million policy. He has been paying $15k per year and the policy is a “pay to age 100” policy. He has decided that he does not need the $1 million death benefit anymore and he certainly doesn’t want to continue to pay the premiums for another 38 years. He has built up $220,000 in cash value. So, he chooses the Reduced Paid Up (RPU) option. By doing this, he gets a death benefit of $480,000 for the rest of his life. Again, without ever needing to pay another premium. Furthermore, that “reduced paid up” policy builds cash value as well because, after all, it is just a smaller version of the original policy.

The “Reduced Paid Up” option is very frequently used in accumulation focused sales, in conjunction with the other items (dividend options, PUAs, term riders, etc.). For example, one of our favorite products that exists today for cash accumulation is a “pay to age 75” product. However, if a 45-year-old wants to cram as much money into the policy over a seven-year period of time, how might he do that on a chassis that requires 30 years of premium payments? He would cram the money in over the first seven years, then in that seventh year chose a “reduced paid up” non-forfeiture option. So now you know how we are able to “short pay” a whole life policy that normally requires perpetual premium payments. Next, we will discuss how the premium is allocated for maximum accumulation. Hint: It is not 100 percent base policy!

GLWB Now, Or Accumulate Then Choose A GLWB Or SPIA?

Charlie Gipple, CFP, CLU, ChFC
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GLWB Now, Or Accumulate Then Choose A GLWB Or SPIA?

A question that I have from my agents occasionally is this, “Does my client do an income rider now, or do they buy an accumulation product now and then purchase an income product once they hit retirement?”

Let’s use an example to clarify this question. You have “Bill,” a 55-year-old that wants to retire in 10 years (age 65) and he has $100,000 that he is looking to tap into for retirement income at age 65. The question is, does he go with the “1-Step” strategy with just one GLWB (Guaranteed Lifetime Withdrawal Benefit) Annuity today, or does he go the “2-Step” strategy where he chooses an accumulation strategy today then in 10 years moves those funds into a GLWB Annuity or a SPIA (Single Premium Immediate Annuity)?

The Math
First off, the wonderful math that exists today around the GLWBs oftentimes make it hard to justify going with the “2-Step” strategy. Said differently, going into an accumulation product (accumulation annuity, stocks, bonds, etc.) today with the expectation that in 10 years one can accumulate enough funds to generate the same income as the GLWB product is a lofty goal.

One of my favorite GLWB annuities will pay a 10 percent simple interest “rollup rate” on the income value between now and whenever the client activates income, even if income is not activated until say age 80. So, at a 10 percent simple interest rate, it would double between now and our hypothetical client’s (Bill) age 65 (10 years). Then, this particular product has a seven percent payout factor. The end result is our $100,000 would end up with an “Income Benefit Base” of $200,000 at age 65. Then, when you multiply that $200,000 by the seven percent payout factor, that means that product would generate $14,000 per year in lifetime income that is guaranteed for life.

When you think of those guarantees on the GLWB, what is the likelihood that you could use the “2-Step” strategy to replicate that? Let’s discuss a couple ways one could look at the “2-Step” strategy and compare the $14,000 that we know is guaranteed with our “1-Step” strategy.

1) 2-Step strategy while using a four percent rule of thumb: With this strategy, Bill would accumulate funds in a good accumulation annuity or a stock/bond portfolio, then he would use the well-known four percent withdrawal strategy. Here is the quick math that I do when I assess this strategy. In 10 years, by using a four percent withdrawal rate, what would the account balance need to grow to in order to get the $14,000 in income that is guaranteed to us with the GLWB? When you divide $14,000 by .04, it comes out to $350,000. So, the question is, can Bill’s “investment advisor” reliably turn that $100,000 into $350,000 over the next 10 years in order to give him the same level of income that the GLWB is guaranteeing? The odds are up there with me winning a ballerina competition. Not likely! (Note: Technically, there is more to this conversation as the four percent rule of thumb technically includes inflation adjustments. If you would like my whitepaper on this, email me.)

2) 2-Step strategy while using an annuity in 10 years: This is the notion that we will still use an annuity, but not until it is time for income. That income can be generated from either a GLWB annuity at that time (age 65) or from a Single Premium Immediate Annuity. We will discuss both below.

GLWB at age 65: Assuming that the seven percent payout factor will still be there in 10 years on whatever value the funds have grown to, it does not take an actuary to tell us that we would need Bill’s $100,000 to grow to $200,000. Then, when he moves that $200,000 into a GLWB annuity and activates income, it would give him the same $14,000 per year. In order for $100,000 to grow to $200,000, the accumulation strategy would need to generate a 7.2 percent compounded rate of return. Can Bill’s “investment advisor” do this with 100 percent certainty? He “may” be able to double his money over 10 years, but it is definitely not a certainty. With the GLWB, that end result of $14,000 is a guarantee.

SPIA (Single Premium Immediate Annuity) at age 65: With this strategy, we use a SPIA in 10 years instead of the GLWB. Once upon a time, the gap between what SPIAs paid and what a GLWB would pay was wider. What that would mean in our example is, by using a SPIA instead of a GLWB, Bill should not need to accumulate as much in retirement savings to generate the same income as what the GLWB would, because SPIA payouts are usually larger. If our GLWB Payout Factor at age 65 is seven percent, then shouldn’t a SPIA pay out much more? Not really.

I ran a SPIA illustration from one of the top SPIA companies with the assumption that we are 10 years down the road and Bill is now age 65 and has managed to grow his $100,000 to $200,000. He now wants to move the $200,000 into the SPIA. Basically, I wanted to compare what a SPIA payout would be on $200,000 versus the $14,000 that the GLWB would guarantee us. The “Life Only” SPIA pays out $15,154 per year. (Note: If you chose a “Life and Period Certain,” as I would recommend, the payouts are even less.)

Again, $15,154 is not much higher than our $14,000 that we can guarantee today.

Using the “slightly” higher SPIA payout in our example, how much would Bill need to accumulate to get the $14,000 in guaranteed income? He would need to grow his money to around $185,000 over the next 10 years. Is it possible? Yes. Is it guaranteed? No.

Now, whether I am just generically explaining why consumers should look at GLWBs today or getting more technical and comparing the math of GLWBs today (1-Step) versus a GLWB/SPIA in the future (2-Step), there is a very important point that I always make.

These products are the best that I have seen in my 25 years in the business, which spans the entire existence of GLWBS, which started in the early 2000’s. As a matter of fact, I am sure some of you that have been around for a while are looking at my assumption in the “2-Step” strategy that these same products will exist 10 years from now with a little bit of skepticism. You would be correct. These wonderful products and the pricing around these products that exist today may not be here 10 years from now, which is actually the #1 reason I often choose the “1-Step” strategy over the “2-Step” strategy. With the “2-Step” strategy, not only is Bill hoping and praying the accumulation strategy performs well, but he is also hoping and praying that these products and pricing will still exist 10 years from now. That is a lot of hoping and praying. My commentary and experience on these products going the way of the dinosaur can be seen in this month’s issue. The title is: Annuities: My Paranoia Of Product Extinction.

Annuities: My Paranoia Of Product Extinction

Charlie Gipple, CFP, CLU, ChFC
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Annuities: My Paranoia Of Product Extinction

Buy annuities now! They are better than they have ever been, and they may not be here forever, at least in their current form. I don’t say that to be a “sales guy” trying to create urgency. I say that because there are memories that are tattooed into my brain that has been one of the most profound learning lessons of my career. I will share them with you below.

In my other article in this month’s edition entitled “GLWB Now, Or Accumulate then Choose a GLWB or SPIA?” I ended the article with the #1 reason I will usually choose purchasing a Guaranteed Lifetime Withdrawal Benefit (GLWB) Annuity now versus accumulating until retirement then choosing an income focused annuity (GLWB or SPIA). Although the math that I laid out in that article by itself should be enough, the “math” is not my #1 reason. What is that #1 reason? Because I am paranoid. Let me explain.

Once upon a time, I was a VP at one of the major variable annuity companies back when variable annuities were the dominant product line in the annuity space. At this time, fixed and indexed annuities industry wide production didn’t hold a candle to VA production. This was prior to the financial crisis that started in 2007. Those traditional variable annuities were largely sold with GLWB riders, and they were good! It was the variable annuity companies that pioneered these riders along with the earlier riders that were Guaranteed Minimum Death Benefit Riders (GMDBs) and Guaranteed Minimum Income Benefit Riders (GMIBs).

GLWBs were a great invention because they guaranteed a certain level of income, regardless of how the VA subaccounts performed. GLWBs were different than their predecessor—GMIBs—in that the GLWBs did not require annuitization. Hence, the difference between a GMIB and a GLWB was generally that the GMIB required annuitization and GLWBs were merely withdrawals that continued even after the account value went to $0. No annuitization required. GLWBs were such a great invention that the indexed annuity world copied the GLWB design around 2005 or 2006.

At the time (around 2006, 2007) our top Variable Annuity GLWB had seven percent compounded roll up rates and payout factors of five percent at age 65. These products sold like hotcakes. Variable Annuity wholesalers across the country were now driving around in Maserati’s, Bentleys, etc.

Then 2008 came and the market started to drop significantly from its previous highs in 2007. The quarterly results/losses of VA carriers started to generate horrible headlines that shed doubt about the future of major VA carriers. That is when the Brokerage firms that distributed these products started to invite carrier product actuaries to conference calls! Crazy thought huh? These actuaries’ jobs were to put these broker dealers and their reps at ease about if these VA companies can actually continue to afford to have such great withdrawal benefits. Afterall, if you have a variable annuity contract that has lost 30 to 50 percent of the “account value” but the carrier is guaranteeing income on a value that grows by seven percent, there will be strain on the carriers that guarantee that ultimate income. Furthermore, as interest rates dropped, the “present value” of the carriers’ future liability became huge! Hence, the capital drain from these VA products was a huge weight on the shoulders of these VA companies.

So, in 2008 and 2009 is when we all got to learn more about carrier hedging, dynamic hedging, futures contracts, put options, delta, theta, Vega, gamma, rho, etc. than we ever wanted to because actuaries were constantly doing calls with distributors. My carrier was saying something like they had hedged to the 99.999 percent, which meant that unless a .001 percent scenario happens in the stocks, futures, bond market, then they will be just fine. This was a consistent line from most VA carriers in the industry, not just mine. Well, .001 percent happened…

It was around early 2009, coming off the Lehman Bankruptcy, the market being down 57 percent, and interest rates plummeting, that the executives of these carriers started to come out and say, “Disregard everything we said previously. It is time to simplify and de risk our products.” The “de risk” buzzword basically meant that the lofty GLWB riders were going the way of the dinosaur. Well, by 2010 many of the products that were loved by distributors and reps were effectively extinct in the VA space.

The combination of the stock market losing over 50 percent in the financial crisis as well as interest rates dropping significantly sank many carriers. But then you had technical accounting issues that added salt to the wound, such as “deferred acquisition cost unlocking.” Billions of dollars of losses were reported by many carriers, quarter after quarter. Many VA companies were also downgraded by ratings agencies and many completely went out of the VA business. All because of this one product design.

For over a decade thereafter, I heard many advisors say, “That XYZ product that you guys sold at your old company, I should’ve sold more of that and should’ve bought more of that.” In hindsight they knew they had a good deal, but it was too late.

The irony was, around 2009, 2010, 2011, the executives of these carriers were now having their fixed/indexed annuity experts train many of the VA wholesalers on how indexed and fixed annuities work. What was once the black sheep of the carrier family of products was now the “last man standing” in many of these carriers, and the main strategic focus. The fixed/indexed annuities had better pricing dynamics and hence these products were more “derisked.”

Fast forward to today. Today, Indexed Annuities guarantee more robust GLWB payouts than the VA space ever did! The traditional VA space (not including RILAs) is about 54 percent of the indexed annuity space from an industrywide production standpoint. Accumulation focused indexed annuities are also better than they have ever been! In my 25 years I have not seen these indexed annuities as attractive as they are now. So, in my other article, I discuss how I am very much about taking advantage of these products that we have today. I will repeat, I don’t say that to be a “sales guy” trying to create urgency. I say that because there are memories tattooed into my brain that formed one of the most profound learning lessons of my career. Get them while we have them.

In closing, I want to be clear that I am not saying that carriers will eventually have to purge the wonderful indexed annuity benefits that we have today. Afterall, Indexed Annuity pricing as well as pricing on the GLWBs have completely different pricing dynamics than the VA space had. For instance, the difference between the “Accumulation Value” in an indexed annuity and the “GLWB Benefit Base Value” will not increase by say 50 percent in any one year because of a market crash. Why not? Because with indexed annuities the client cannot lose their account value. That means that the carriers “amount at risk” is not subject to as much volatility. That is right, the stability of the account value of an indexed annuity actually helps the carrier “hedge” the GWLB benefit on that same annuity.

What I am saying is, these products have never been better and that is largely because of where interest rates have been recently and where they are now. These higher rates may not last forever. Remember what I said earlier, if a carrier is guaranteeing a future income stream, lower interest rates means that their liability/capital requirements increase. If interest rates go lower, just don’t be in a position where you say, “I wish I sold more of that.” Some healthy “paranoia” is OK.

The Best Candidates For ROTH IRAs And A Case Study

Charlie Gipple, CFP, CLU, ChFC
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The Best Candidates For ROTH IRAs And A Case Study

Some of the best candidates for Roth IRA conversions are those that have saved a lot of money (pre-tax IRAs, 401ks, etc) throughout their working years relative to their income. Those that have been a little more frugal than the average person. This oftentimes means that their retirement income can be just as much or more than their pre-retirement income. So, even if prevailing tax rates do not increase, they may still be in a higher tax bracket in retirement than they were prior to retirement. On top of that, tax rates have nowhere to go but up! No, I will not bore you with more statistics about the fiscal situation our nation may be facing.

For these folks like the above—along with many others-it might make sense to pay taxes on that “seed“ today, in order to not pay taxes on the “harvest“ later on. Especially if at harvest time your tax rates are higher. That is what a Roth IRA conversion allows people to do.

Case in point. This week we worked with a single 58-year old client who makes $93,000 per year currently, as he is still working. He is currently in the 22 percent tax bracket that goes up to $100,525 in taxable income. With his standard deduction, he is comfortably below the next bracket, 24 percent. Here is his problem: He has saved for retirement $1.5 million in pretax accounts! He has been able to amass that amount of money for a couple of reasons: 1) He has been frugal and has obsessively saved. 2) He used to make more money than what he is now with his prior job. Anyway, with that large warchest of a retirement portfolio, along with Social Security, he will be able to take retirement income that is well into the six figures and definitely higher than he is currently experiencing while in his working years. He is going to have a great retirement! However, we can help him make it even better.

For this client, the Roth IRA conversion is a perfect scenario! Also note that folks that have retired early and have a “dead period” when it comes to income are also great for Roth IRA conversions, because they are in a low tax bracket.

We are actually doing a lot of different things with his $1.5 million portfolio where we are using annuities, equities, and bonds. The part that I want to highlight for the purposes of this article is what we are doing with the $500,000 that we are putting into an annuity with a GLWB.

We are putting $500k into an annuity company that has a great GLWB benefit (obviously). This annuity will allow us to convert on a “piecemeal” basis $70k per year for the next seven years. With the mere signing of a form, a “mirror“ Roth IRA account is set up and each year we can convert a chunk ($70k) of the traditional IRA into the Roth IRA “Mirror Account.” And most importantly, the GLWB benefit base moves to that mirror account proportionately. This means that the power of the ongoing GLWB rollups will be retained by 100 percent of the client’s money, even as it moves from the Traditional IRA column over to the Roth IRA column. The taxes will be paid each year by money that will come from one of his money market accounts we have set up.

What is the end result of this? In seven years, when he retires, he will have about $60,000 per year in tax-free income that is guaranteed forever coming from this annuity! That, in addition to Social Security, will mean that he will have six-figures of retirement income that is guaranteed forever. Plus he has the other $1 million of his portfolio on top of it that we will also be partially converting as the years go by. He will do all of these conversions on a large part (not all) of his pre-tax portfolio, without ever leaving the 24 percent tax bracket, which ends at approximately $192k.

I would argue that with a six-figure income in retirement, if all of his money was otherwise “pre-tax” he would be in a higher tax bracket than 24 percent with what the future holds. We helped him significantly.

Social Security “Layering” Versus “Bucketing”

Charlie Gipple, CFP, CLU, ChFC
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Social Security “Layering” Versus “Bucketing”

If you have not read last month’s article that is somewhat of a prequel to this one, please refer to “Social Security Prospecting Is Bait And Switch“ from April.

In that article I discussed how Social Security is about so much more than just Social Security and “crossover point analysis“ that many of us have seen. Crossover analysis is done by looking at the cumulative benefits of Social Security by filing at 62, 67, 70, etc., and which one comes out better at certain points in time in the future. This type of analysis is oversimplified for various reasons (taxes, time value of money, etc.). Let me explain by using my Monte Carlo Software.

As I go over this analysis, you will find that this conversation is about so much more than just projecting how long one will live then selecting the best timing based on our expectations. There is much more to it than that when you take into consideration taxes and RMDs. As I often tell my clients and agents, “Social Security optimization is about so much more than just Social Security. It is also about the other retirement income that can add to Social Security Taxation.”

Example client
Here is our example client. I’m simplifying it with one individual–Johnny–who was born in 1960 and has a full retirement age (Per Social Security) of 67 and his Social Security statement shows at full retirement age his benefit amount is $2,000 per month. That is his “primary insurance amount.” He also has a $1 million stock/bond portfolio (50/50) that is all Pre-Tax IRA money. Johnny wants to retire next year, 2025. Johnny is hoping that he can get at least $50,000 per year in today’s after-tax dollars in retirement income. That income he needs to adjust for inflation each year until he dies. What is his “retirement number” as I call it? That is what Monte Carlo simulations solve for.

In short, what Monte Carlo simulations do is it answers the question of: “When Johnny retires, how much is it in today’s dollars that he can take in retirement income among all of his sources of income so that he statistically does not run out of money?” The system will come back with a dollar amount that he “should” be able to take in order to last him his lifetime–which I put in as age 92. I wanted to be aggressive with the lifespan because I want to be conservative with his retirement income so he does not run out of money. Furthermore, the amount of income that the system comes back with is based off of a 95 percent confidence rate, which I won’t go into here. It’s irrelevant to this article.

Layering approach
The first scenario is what I call the “layering approach.” This is when consumers automatically file for Social Security once they retire, age 65 in Johnny’s case, and then just layer on top of it his portfolio income, which is 100 percent pretax in our simplified example. So the question is, what is the after-tax dollar amount that Johnny can take in his first year of retirement and then, adjusting for inflation, each year thereafter by taking this approach? The system came back with the following shown in Chart 1.

As you can see, $46,140, which is almost $4,000 short of our goal that Johny wanted of $50,000 in retirement income. Currently there is no difference between the box on the left and the box on the right. However, once we start to optimize his income by adjusting Social Security, you will see the box on the right, which is the plan, increase.

Now in chart 2 is what I mean by “layering.” What Johnny did was he took Social Security blindly at age 65 because he did not have a glorious agent like yourself to advise him on other strategies. But then on top of the Social Security he just blindly took from whatever portfolio he had, which was all qualified money. The lack of coordination among various income sources is quite common with the average consumer. Just blindly take what you need and layer it on top of your Social Security! When folks cook meals, they usually “coordinate” the various sides, main courses, etc. The below is equivalent to eating a Ribeye along with a glass of chocolate milk.

The gray bar is his Social Security, which is slightly penalized because he took it two years early, and the blue bar is his withdrawals from his $1 million portfolio. $22,794 is coming from Social Security and the difference of $24,730 comes from his portfolio. The total of those two numbers is $47,524. That is, $46,140 but with one year of Inflation adjustments, since he is retiring next year.

For you annuity folks, you are reading that correctly! The system is saying that on an inflation adjusted basis, only $24,730 can be taken from his $1 million portfolio to be sustainable until age 92 based on a 95 percent confidence! Yes, there is an annuity sale here, but not in this article…

The red line is how much the system projects he can take on an after-tax basis, and the green line represents the amount he needs to withdraw from his portfolio in order to get the red line after the taxes have been paid. In short, the “lines” are how much his expenditures are in retirement, and the “bars” are how he finances them. By the way, notice the yellow line. That is his required minimum distributions, which are approximately $35,000 when he turns age 75.

The bucketing approach
So now I asked the system, “What is the optimal Social Security filing age from an after-tax income standpoint based on our assumptions?” Check out our green box in Chart 3. This is where our green box starts to deviate from our original layering scenario and where we start to truly help our clients! How are we able to get him almost 10 percent additional income based off of the projections? The system says by filing for Social Security at age 70.

Now, filing at age 70 giving Johnny more income over his life may be no surprise to you, but what may be surprising is what all contributed to getting more after-tax income at age 70. It has to do with more than just “Delayed Retirement Credits” that the Social Security Administration gives us by delaying. In this case, it has to do with the “bucketing approach” that is represented by the new cash flow shown in Chart 4.

What I mean by “bucketing” is this. Relative to our first scenario, our dark blue bar is separated out from the gray bar, on a relative basis. By delaying Social Security until age 70, we are also becoming less reliant on portfolio income once that Social Security comes in. This is because the Social Security checks are so much larger via the Delayed Retirement Credits. And because we have less pre-tax income coming in at the same time we are taking our Social Security, it can decrease Johnny’s Provisional Income and thus his Social Security taxation. Don’t believe me? Check out Johnny’s projected Tax Returns (see Chart 5) in the year 2034 for each of the two scenarios.

The “Layering” Tax Return
Notice in line 5a on his tax return that he received $29,741 in Social Security income but yet $23,931 was taxable! That is over 80 percent of his Social Security that is taxed. Why? Well again, because he was very reliant on the pre-tax income represented in line 4a and 4b. Line 4b added to his provisional income, which also made his Social Security more taxable! The end result of all of this was, as shown in Chart 1, he falls $4,000 short of his $50,000 goal on an after-tax basis.

Compare that tax return to the one in Chart 6. This one is using our “Bucketing Approach.”

The “Bucketing” Tax Return
Now, less than half of his Social Security is taxed. This is because he is less reliant on our 4a and 4b!

Concluding thoughts:
The “Bucketing Approach” may not give the most income in every scenario, especially those scenarios where the consumer is on one extreme side of the retirement income spectrum. However, speaking with consumers about the bucketing approach does have additional advantages, such as:

  1. During those “bridge years” between age 65 and 70 in our example, Johnny is spending down a significant amount of his pre-tax dollars. This oftentimes reduces his RMDs later on. Consumers hate RMDs if they don’t need the money!
  2. The tax rates assumed above are today’s tax rates. The case for “bucketing” becomes even more pronounced if we assume significant tax increases due to our fiscal situation. The end effect of the bucketing approach can be that Johnny is paying taxes on his pre-tax dollars earlier, when tax rates are possibly “on-sale.”
  3. The bucketing approach can also help in reducing “IRMAA,” which determines Medicare Premiums.

You can see how this analysis oftentimes leads you to a conversation about Roth IRA conversions. If Johnny had all Roth IRA money rather than Traditional IRA money, this calculus completely changes.

Social Security Prospecting Is Bait And Switch

Charlie Gipple, CFP, CLU, ChFC
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Social Security Prospecting Is Bait And Switch

One of the top ways that my agents get in front of consumers is by them—the agent—understanding Social Security retirement benefits in order to help their clients file correctly. Some folks who have never really dug into Social Security filing strategies will say that Social Security is a “bait and switch” method of getting in front of clients. I disagree!

Furthermore, when consumers are concerned with maximizing their Social Security, it is because they are concerned about increasing their retirement income. Mr. Obvious here I know. So, if you are in the business of helping your clients generate more retirement income, it is a natural transition to and from the topic of Social Security.

Folks will also say Social Security filing timing (age 62? age 67? Age 70?) is as simple as: Does the consumer have longevity in their family or not? Hence, if you have good longevity in your family, file late; if you have no longevity, file early.

I recently saw a LinkedIn post where the gentleman showed a “crossover” graph that showed at what age in a person’s life will filing late (age 70) be better than filing early (age 62). He had two lines that represented the cumulative benefits received by Social Security. The “Age 62” line started accumulating at age 62 but the slope of total benefits was fairly flat. He compared that line to the “Age 70” line that started accumulating at age 70 but was steeper. The “crossover point was around the client reaching their early 80’s. The gentleman exclaimed in bold letters, “There! The math is the math!”

Wrong! This “crossover analysis” is overly simplistic because it doesn’t take into consideration taxation on Social Security benefits as well as the impact on Required Minimum Distributions! I know what you are thinking, “How on earth does Social Security timing impact Social Security taxation and also Required Minimum Distributions on IRAs?” I will get to that in a bit.

As I tell consumers, “I don’t care about the amount of Social Security that you get. I care about the net net net amount of Social Security that you get.” What I am referring to there has to do with minimizing Social Security taxation, which is a function of their provisional income, which is a function of the various other types of retirement income that the consumer has coming in—which is something that you, the financial professional, should be deeply involved with. Again, Social Security should be a natural part of anybody’s business that focuses on helping their consumers get more retirement income, which is certainly most of you that are reading this article.

In next month’s article I will be digging into an actual scenario by using my planning software, but in the meantime I will address how the taxation of Social Security and also how the size of RMDs can be adjusted by the timing of their Social Security.

In the analysis, I will discuss the difference between a person that retires at age 67, files for Social Security at age 67, and then just blindly takes additional income from their IRA portfolio that is needed to finance their monthly expenses. This is what many consumers do! Then I will contrast that with the person that retires at the same age (67) but delays Social Security until age 70. With this second structure, they are less reliant on income from their pre-tax IRA portfolio while they are on Social Security. Why is that? Because they have a higher Social Security amount coming in because they waited until age 70 and got all of their “delayed retirement credits.” And since they are less reliant on income from their pre-tax accounts, Social Security taxation can possibly be less, because their provisional income is less.

What about Required Minimum Distributions that people fear in the future when tax rates will likely be higher? Well, in our second scenario, those “bridge years” between age 67 and 70, the client had to draw down their pre-tax IRA dollars because they retired at age 67 and didn’t file for SS until age 70. So, on a relative basis, with our second option (the person who filed at 70), they have a lower pre-tax IRA balance on a relative basis once they start needing to take RMDs. Hence, that person will be less “punished” when it comes to the size of the RMDs.

Again, next month, we will put numbers to this and by the end of the article, it will be obvious that Social Security is about so much more than just the simple “crossover analysis” and “bait and switch.”

My Horrible Experience With A “Personal Banker”

Charlie Gipple, CFP, CLU, ChFC
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My Horrible Experience With A “Personal Banker”

A client of mine has been going crazy as she is the power of attorney for one of her family members, as well as a trustee of the revocable trust for that family member. She has been running all over the place getting affairs in order and is stressed!

This client asked for my help to go into one of the major banks (where the money is) with her to speak with a “personal banker/financial advisor” about simplifying and consolidating a bunch of the accounts, as well as making sure that everything is in the name of the trust. I volunteered to help, since estate planning is one of my specialties. Plus, I know this institution will make her life hell if I am not there to wade through the technicalities for her. I knew the odds of the personal banker understanding trust and POA issues is right up there with the odds of me being drafted to the NBA.

I figured the personal banker would not be enthused with having me there, because I am a competitor! But hey, it’s not about him, it is about my client. Plus, if everything goes smoothly, I don’t need to say a word…

The Meeting
The personal banker we met with was a young kid and, sure enough, was absolutely clueless about anything having to do with power of attorneys, springing power of attorneys, trustees on revocable trusts, successor trustees after death has happened, etc. Again, I knew this would be the case before I even walked into the bank. I’ve seen it a million times where banks hire young kids to deal with major league stuff, estate planning for example!

At first, I kept quiet. My client started out discussing details about how she needed to change the titling of the accounts to the trust as well as to make sure her POA is on file, etc. The banker then stated that this client I was with was merely the successor trustee and currently had no power to do anything—at least until death of the grantor—with any of the accounts at the bank. So, I had to educate him by pulling up the trust on my phone and telling him the successor trustee thing was for after the death of the grantor when the revocable trust becomes irrevocable. However, this person is currently one of three trustees of the revocable trust and can act independent of the other two trustees, per the first few lines of the trust documents. Eventually, I had to educate him that the trustee does indeed have the authority. (Note: That is how revocable trusts work. They become irrevocable upon death! He did not know this.)

He also initially stated that he needed the notarized signature of the grantor, who is currently in the nursing home. I said, “That’s not correct, do we drag her out of the nursing home to go to a bank to get a notary?” He said, “They probably have a notary in the nursing home.” I was trying to not internally combust. At this point, he still does not know what I do for a living because I did not pull the “do you know what I do?” card… Yet…

He even questioned the power of attorney, asking if the person/principal was incapacitated yet. I had to tell him that it didn’t matter because this was not a “springing power of attorney“ and was actually effective right now. He wasn’t going to allow her to act as POA for that individual as well unless we could prove incapacitation. (Note: Springing Power of Attorneys only become effective at incapacitation. (This was not a Springing POA and already in effect! He did not know the difference.)

With him questioning her power as the trustee and also her power as the POA—even though the documents were right there in front of him—he was effectively “vetoing” any power that she legally had to help her family member. As I dug into the details, which were above his head, he threw out the line about “We are not allowed to give legal advice.” That is when I “officially” introduced myself and what I do for a living. I then told him, “Actually from a legal standpoint, the trust and Power of Attorney documents in front of you are crystal clear. The legal situation is clear, so there is no “legal advice” needed. However, you are telling us that from a policies and procedures standpoint, this bank will not accept the legal documents.”

This is when he swallowed his pride and called the document attorneys at the bank to confirm what I was teaching him. They confirmed. He wouldn’t have done this if I did not push back on him. He initially, until I got more vocal, said “Sorry, there is nothing you can do.” If I were not there giving an estate planning dissertation to him he would’ve had my client walk out helpless. I should send the bank a bill for my time training their employee…

The point is, this made me sick and ashamed that consumers have to go through what she would have gone through without my help. Time and time again I have seen these banks pull the “We cannot give legal advice” ripcord because they are scared to death of being sued. They will even say this when it is not legal advice they are giving but their ego refuses to be proven wrong. So, again, they pull that ripcord and send the frustrated client on their way! You may have witnessed this before too.

Dealing with life savings of retirees is major league stuff where decisions are made based on millions of dollars. Nothing wrong with being “a kid” but this is not amateur hour.

At the end, and after two hours, the bank did what they were supposed to do from a legal standpoint and my client did what she needed to do. If he knew about estate planning it would have been a 30-minute meeting. He was a nice kid, and I was patient for a long time, but when misinformation creates undue hardship on my client some “tough love” was needed.

Unfortunately, people feel that these big banks must have world-class people because, after all, they are big banks with big buildings and big advertising. Well, many times it is kids that are not CFPs, CFAs, CLUs, ChFCs, etc., and have less than a decade of experience. Granted, there are some very capable professionals in banks and maybe you—the reader—are one of them. However, my opinion is that for the young kids getting that “job” at the bank, they are often given tasks like estate planning issues which are above their heads. Plus, banks try to do everything and specialize in nothing, which leaves the personal bankers knowledge an inch deep and a mile wide. This is a large contrast to how independent financial professionals work.

In 1933, congress passed the Glass-Steagall Act which basically kept separate the banking functions and investment functions. Hence, for the longest time, banks were only allowed to do what banks did best—lending money and taking deposits. They weren’t allowed to do the investment/retirement planning functions that they try to do today. Then, in 1999, with the passage of the Gramm-Leach-Bliley Act, the walls separating banking from investments came down. Now you have banks doing everything from loaning you money, to selling you credit cards, to investing your retirement portfolio. Specializing in nothing and generalizing in everything. Well, my experience is a good example of how our clients might be better served if the Glass-Steagall Act or something like it was still in effect.

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