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Ross Friend

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Ross Friend, JD, CLU, ChFC, FLMI, consults with advisors nationwide specializing in premium financing for professional and business owners. Friend received a BA summa cum laude from Boston College and a JD from Emory University, where he was the editor of Emory Law Review. He has the distinction of being a FINRA arbitrator and is a frequent speaker at industry conferences and company meetings.

Should I Add Annuities To My Retirement Plan Or Not?

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Demystifying the annuity conundrum (are they all good or are they all bad?

It seems there is a divided financial services industry which fully embraces annuities as an intelligent complement to social security and other nonliquid assets and the other side of the industry that “bashes” annuities as investments too risky, too complex and commission driven so ipso facto stay away from them all.

Based on my 30 plus years in this industry acting in several capacities(as a General Counsel of a prominent life carrier, as a Chief Compliance Officer supervising hundreds of financial advisers, or as an independent financial advisor) I respectfully submit that both industry camps would serve the public better in not taking sides, i.e. with bad apples in both camps, a trusted adviser should and can serve his/her client’s best interest using both models where suitable. Yes, there are some annuities that have hidden charges, are overly risky and should be shied away from. Similarly, there are advisors who manage clients assets and profess to be “better” yet despite their window dressing are in the bottom line receiving far more compensation than they would by suggesting a risk free annuity with lifetime guarantees without extra rider charges.

To walk the talk, my wife and I have assets, some being managed by large institutional entities, and about a half a dozen lifetime annuities which pay us monthly and provide peace of mind that we don’t worry about the unpredictable stock market being severely affected by the incessant political infighting in Washington and unstable global economy. Presented with full disclosure of the advantages and disadvantages, a trusted advisor can and should educate a client approaching retirement with this landscape and suggest options so the client can make an informed decision about what is most suitable for him/her in terms of risk tolerance (baby boomers are likely more conservative at this time of life).

Anti-annuity bashers frequently misunderstand the myriad of annuity options and find it far simpler to say stay away because commission is paid upon sale. For example, a life only annuity with no period certain for the carrier to pay would be an extremely rare if ever good recommendation since one would make a single lump payment and take the risk that if they passed immediately after accepting the annuity, they would lose the entire investment after a single payment. If the policyholder has beneficiaries (the majority of clients do) this type of recommendation would be not only not in the client’s best interest but also “malpractice.” Query why commission is such a negative yet the majority of the retail industry is based on commission. Would one say all service providers, even waiters/waitresses, could be accused of steering their customers to the highest priced entrees since that will end up with a bigger bill thus higher tip? I’m sure we would agree some do but that doesn’t mean we can not discern what is in our “best interest” and what we would enjoy the most.

According to the Life Insurance Marketing and Research Association (LIMRA), annuity sales in 2022 totaled $310.6 billion, a 22 percent increase from the 2021 sales of $254.9 billion. Taking a layman’s noneconomic inference, 2008 had set the record in annuity sales (which has been far surpassed last year) in part attributed to the severe downtown with the stock market correction due to the dot com companies facing retrenchment. Now, when we are in an era of the baby boomers approaching and entering into retirement, desperate to find safety and security, this has led to massive annuity purchases notwithstanding money managers spending millions on TV advertisements saying to being wary. Todd Giesing, assistant vice president, LIMRA Annuity Research, recently stated the “Fluctuating interest rates in the fourth quarter prompted investors to lock in crediting and payout rates while they were high. Our forecast suggests that protection products will continue to boost growth in the annuity market for the next several years.” Fixed annuities provide downside protection against an unpredictable market whereas sales of variable annuities have suffered for precisely the same reasons when certain policies cannot offer this floor.

I don’t want to tip the scales for either camp since my defense of some annuities could lead certain pure money managers only accusing me of the famous line in Shakespeare’s Hamlet: “The lady doth protest too much, methinks.” (Kind of my pet peeve of not trusting anyone who says to me, “I’m telling you the truth.”) Isn’t that what you should have been already doing without saying you are?

Annuities will have varying degrees of decreasing surrender charges. For those unaware, This means that your money that you set aside into an annuity is held by the carrier who invests the funds and makes their own hedging bets counting on the funds being relied upon for the carrier to make a better spread than what they are offering to the public. The client is not incurring any charges if he/she lets the money grow during this period and allows the surrender charges to go down to zero. A downside is that this money is in a sense not liquid during this period although some carriers allow you to make a 10 percent annual free withdrawal. For qualified funds, if at an age when you have to take annual Required Minimum Distributions(RMDs), these withdrawals are also not subject to any current surrender charges. If you will never be comfortable in not having instant access at any time to all your funds, then annuities are not for you.

So how do you move forward with adding annuities to your overall retirement plan? Naturally, only a portion of your assets should be considered for this investment and the carrier itself ensures that no policyholder has unwittingly tied up the majority of their net worth.

In conjunction with adding another bucket(s) of guaranteed lifetime income for you and your spouse, for those clients I have worked with over the years they will always hear me on my soap box that long term care protection needs to be built into one’s overall retirement plan. (See My Long Term Care Story as an Advisor, Broker World 10/2021.) Obtaining this protection is a gift to your children and/or younger family members who love you. Maybe you have to experience or observe the enormous cost and challenging toll on the caretaker’s time, and emotional wear and tear, to really appreciate the urgency of incorporating this into a plan.

Assuming one’s children volunteer—that there is no worry that they will, of course, take care of you—this loving commitment is unfortunately probably unfair to the younger generation. Outside agency caretaker costs are annually increasing exponentially more than inflation. One client relayed that perhaps I misunderstood his culture. Perhaps so but I doubt it. Walking in on a loved one naked on a bedroom floor having soiled himself might change my friend’s perspective.

Getting one’s affairs in order requires an attorney who can draft a will, set up Powers of Attorney both over you and your property, health directives or trusts as the case may be. Even with my law degree, and multiple security licenses I have held, I usually but not always add annuities with no extra riders attached, include a long term care policy, and life insurance that serves as instant cash to help some estates pay estate taxes without having to sell at less than fair market value other existing appreciated assets. Or, for smaller estates, the life policy’s cash to loved ones is never a bad decision.

This planning is not rocket science. Knowing your advisor, feeling comfortable he/she is experienced, will result in you having peace of mind. Not worrying about the future of your loved ones equates to starting now. Why? I refer you to a book called Still Alice by Lisa Genova about a cognitive psychology professor at Harvard, 50 years of age, who recognizes that she has early stages of dementia and tries unsuccessfully to set her affairs in order before the impairment becomes too severe.

Should I Add Annuities To My Retirement Plan Or Not?

0

Demystifying the annuity conundrum (are they all good or are they all bad?

It seems there is a divided financial services industry which fully embraces annuities as an intelligent complement to social security and other nonliquid assets and the other side of the industry that “bashes” annuities as investments too risky, too complex and commission driven so ipso facto stay away from them all.

Based on my 30 plus years in this industry acting in several capacities(as a General Counsel of a prominent life carrier, as a Chief Compliance Officer supervising hundreds of financial advisers, or as an independent financial advisor) I respectfully submit that both industry camps would serve the public better in not taking sides, i.e. with bad apples in both camps, a trusted adviser should and can serve his/her client’s best interest using both models where suitable. Yes, there are some annuities that have hidden charges, are overly risky and should be shied away from. Similarly, there are advisors who manage clients assets and profess to be “better” yet despite their window dressing are in the bottom line receiving far more compensation than they would by suggesting a risk free annuity with lifetime guarantees without extra rider charges.

To walk the talk, my wife and I have assets, some being managed by large institutional entities, and about a half a dozen lifetime annuities which pay us monthly and provide peace of mind that we don’t worry about the unpredictable stock market being severely affected by the incessant political infighting in Washington and unstable global economy. Presented with full disclosure of the advantages and disadvantages, a trusted advisor can and should educate a client approaching retirement with this landscape and suggest options so the client can make an informed decision about what is most suitable for him/her in terms of risk tolerance (baby boomers are likely more conservative at this time of life).

Anti-annuity bashers frequently misunderstand the myriad of annuity options and find it far simpler to say stay away because commission is paid upon sale. For example, a life only annuity with no period certain for the carrier to pay would be an extremely rare if ever good recommendation since one would make a single lump payment and take the risk that if they passed immediately after accepting the annuity, they would lose the entire investment after a single payment. If the policyholder has beneficiaries (the majority of clients do) this type of recommendation would be not only not in the client’s best interest but also “malpractice.” Query why commission is such a negative yet the majority of the retail industry is based on commission. Would one say all service providers, even waiters/waitresses, could be accused of steering their customers to the highest priced entrees since that will end up with a bigger bill thus higher tip? I’m sure we would agree some do but that doesn’t mean we can not discern what is in our “best interest” and what we would enjoy the most.

According to the Life Insurance Marketing and Research Association (LIMRA), annuity sales in 2022 totaled $310.6 billion, a 22 percent increase from the 2021 sales of $254.9 billion. Taking a layman’s noneconomic inference, 2008 had set the record in annuity sales (which has been far surpassed last year) in part attributed to the severe downtown with the stock market correction due to the dot com companies facing retrenchment. Now, when we are in an era of the baby boomers approaching and entering into retirement, desperate to find safety and security, this has led to massive annuity purchases notwithstanding money managers spending millions on TV advertisements saying to being wary. Todd Giesing, assistant vice president, LIMRA Annuity Research, recently stated the “Fluctuating interest rates in the fourth quarter prompted investors to lock in crediting and payout rates while they were high. Our forecast suggests that protection products will continue to boost growth in the annuity market for the next several years.” Fixed annuities provide downside protection against an unpredictable market whereas sales of variable annuities have suffered for precisely the same reasons when certain policies cannot offer this floor.

I don’t want to tip the scales for either camp since my defense of some annuities could lead certain pure money managers only accusing me of the famous line in Shakespeare’s Hamlet: “The lady doth protest too much, methinks.” (Kind of my pet peeve of not trusting anyone who says to me, “I’m telling you the truth.”) Isn’t that what you should have been already doing without saying you are?

Annuities will have varying degrees of decreasing surrender charges. For those unaware, This means that your money that you set aside into an annuity is held by the carrier who invests the funds and makes their own hedging bets counting on the funds being relied upon for the carrier to make a better spread than what they are offering to the public. The client is not incurring any charges if he/she lets the money grow during this period and allows the surrender charges to go down to zero. A downside is that this money is in a sense not liquid during this period although some carriers allow you to make a 10 percent annual free withdrawal. For qualified funds, if at an age when you have to take annual Required Minimum Distributions(RMDs), these withdrawals are also not subject to any current surrender charges. If you will never be comfortable in not having instant access at any time to all your funds, then annuities are not for you.

So how do you move forward with adding annuities to your overall retirement plan? Naturally, only a portion of your assets should be considered for this investment and the carrier itself ensures that no policyholder has unwittingly tied up the majority of their net worth.

In conjunction with adding another bucket(s) of guaranteed lifetime income for you and your spouse, for those clients I have worked with over the years they will always hear me on my soap box that long term care protection needs to be built into one’s overall retirement plan. (See My Long Term Care Story as an Advisor, Broker World 10/2021.) Obtaining this protection is a gift to your children and/or younger family members who love you. Maybe you have to experience or observe the enormous cost and challenging toll on the caretaker’s time, and emotional wear and tear, to really appreciate the urgency of incorporating this into a plan.

Assuming one’s children volunteer—that there is no worry that they will, of course, take care of you—this loving commitment is unfortunately probably unfair to the younger generation. Outside agency caretaker costs are annually increasing exponentially more than inflation. One client relayed that perhaps I misunderstood his culture. Perhaps so but I doubt it. Walking in on a loved one naked on a bedroom floor having soiled himself might change my friend’s perspective.

Getting one’s affairs in order requires an attorney who can draft a will, set up Powers of Attorney both over you and your property, health directives or trusts as the case may be. Even with my law degree, and multiple security licenses I have held, I usually but not always add annuities with no extra riders attached, include a long term care policy, and life insurance that serves as instant cash to help some estates pay estate taxes without having to sell at less than fair market value other existing appreciated assets. Or, for smaller estates, the life policy’s cash to loved ones is never a bad decision.

This planning is not rocket science. Knowing your advisor, feeling comfortable he/she is experienced, will result in you having peace of mind. Not worrying about the future of your loved ones equates to starting now. Why? I refer you to a book called Still Alice by Lisa Genova about a cognitive psychology professor at Harvard, 50 years of age, who recognizes that she has early stages of dementia and tries unsuccessfully to set her affairs in order before the impairment becomes too severe.

How Does A Financial Advisor Retire? (The Emperor Has No Clothes?)

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Several years ago, there was a financial study that found that most people spend more time planning a family vacation than they do retirement and estate planning. I get it. Its is an uncomfortable topic: Is one afraid to stop working for fear that 1) they may run out of money, a more realistic concern with recent rampant inflation, geopolitical concerns, and interest rate hikes; 2) since they have been working for so many years, subconsciously they always have defined themselves as a____________(at least at social functions) and may feel odd saying that they are “retired.” Since for several years I have been working from home, I recall going to the supermarket one morning during the week and felt this weird sensation when I saw so few shoppers my age that I thought the other shoppers were all looking at me as if I was unemployed. I felt like shouting, “Hey, I’m still working successfully and am not a loser.” Reflecting on that insecurity in the past now makes me realize that retirement has a wide range of feelings for all of us which, with proper planning, will allow us to enjoy the fruits of our laboring years.

For those in the financial services industry, there is a large divide between advisors who are primarily compensated on commissions on the sale of products compared with advisors who tout that they are “always” acting in the clients’ best interests since they are compensated on the recurring fees they receive on “managing” their clients’ assets in part or in whole. Suffice it to say that there are advisors in both camps who truly act in their clients’ best interests with or without a “fiduciary” legally imposed obligation and similarly advisors in both camps who do the opposite.

Formulating a retirement plan whether one does it at an early stage of one’s working career or when one finally or officially stops working, you will see rarely ends up playing out as a person anticipated. Naturally, unforeseen life events take place so developing and anticipating as many contingencies that may occur will assist in the transition process creating less anxiety for you and your loved ones.

Assuming that you start with the timing of commencing social security, that decision, although on its face simple, does involve taking a holistic approach to all the other contingencies, e.g. your anticipated mortality and whether your assets are adequate enough to bridge you to age 70 to take advantage of the eight percent simple growth of your payment.

As you can imagine, I have seen poorly planned or unaddressed legacy issues leave siblings or family members ceasing all contact when elder family members passed due to perceived inequities in the asset distributions. Incredible that family members spend a lifetime together sharing feelings, good times and bad times, caring for each other, yet poor or inadequate planning leaves them forever lost to each other. Not what the elder family members ever could have thought possible. I am afraid to relay I have seen this in my practice more than most folks could believe.

Please read my article My Long Term Care Story As An Advisor (October 2021 Broker World issue) to see how my parents failed to plan for long term care expenses, and to this date my mother’s assets have been completely been wiped out leading to my siblings and I paying for her ongoing care—which is now well over 10k per month. Query whether parents really think that without proper planning that they can assume their children will be financially responsible for them whether they can afford to or not? I would submit that is not the case from either side’s perspective.

It is truly challenging to address retirement issues for fear of running out of funds, so do you need to change your lifestyle or rush out and try to do any supposed bucket list item you’ve been dreaming of for so many years before you are physically unable to do so? What is “enough” (assets accumulated)? Most people don’t drastically change their lifestyles upon that Monday morning when there is no job or work to be done. Some gradually see the “finish line,” slow down, and then say, “I’m going to start exercising, start taking more trips, start a new hobby I’ve been procrastinating about undertaking, or volunteering for a cause that I care about, take classes, read more books, join clubs to make new friends.” The list can be endless. Is it really realistic? One client told me over many years that it was not a matter of if he was going to get divorced but just when, e.g. when his kids left middle school, then when his kids left high school, then when his kids graduated college. As of this writing, he and his wife are still married and his kids both have graduate degrees and young families.

Can one truly flip a switch and now finally start living what some would say is a life like they always really wanted? The concern as you age may not only be “Do I have enough funds to last?” but also “Will my health allow me to be as active as I thought I always wanted to be?”

Sitting down with a reasonable advisor and attorney seems to be a fundamental starting point. There are many pundits, and I am including friends and family members who opine some approaches but probably more conflicting ones. I used to joke that a New Year’s Resolution we should all attempt to abide by is not to follow the advice of one’s brother-in-law. I do not always practice what I preach, since being divorced and remarried I have fallen for this approach on a couple of occasions.

Bad or little to no planning will create a poorly managed retirement and a burden on our loved ones to figure out the mess we left.

Not surprisingly, I recommend you still sound out referrals for that”‘reasonable trusted financial advisor and attorney.” To use a common maxim, no one approach fits all but building buckets of streams of income for you and your loved ones, talking with family members about your intentions, possibly with your advisor/attorney, may ease the challenges upon hearing your plans and contingencies. Personally, my wife and I have set up several annuities supplementing our lifetime income and have a modest amount of life insurance and long term care coverages so as not to burden our children. We have addressed the needs of one adult special needs child, another challenging task in and of itself. Finally, I can go to the supermarket during the week and not have to feel uneasy—although during COVID wearing a mask was not that bad.

My Long Term Care Story As An Advisor

Working in the financial service industry for over thirty years, my personal experience with family long term care issues may resonate with many and hopefully will provide insight and motivation for other advisors and their clients.

My Dad passed away over 10 years ago and spent his last years in a locked down nursing home suffering from dementia and other ailments. His experience illustrates the frustration many of us face in how to anticipate the potential costs of long term care and whether and when we should secure coverage. If one has excess savings of $1 million, $5 million, etc., is this enough to self insure this risk? No one can predict how long and how much coverage you or a loved one will need but perhaps the current expenses my family is incurring will shed light on how prudent it will be to act and act now.

My Dad got to a point where he no longer recognized loved ones, however, his lifelong hobby of playing the piano was telling as to why none of us will want to spend our last years in the most restricted portion of any nursing home rather than in our current home with caring home health workers helping us where needed.

Although I lived out of state from my Dad and did not visit him as often as I should have before his passing, I was told he frequently played on the piano the song, Don’t Fence Me In by The Andrews Sisters. Query how he no longer could appreciate who his loved ones were, but obviously was able to express his feelings about his last years. Not a ringing endorsement of nursing homes, but understandably his wanderings did require, for his own protection, a facility where he would be safe.

Since most of our clients will never qualify for coverage under Medicaid with the law prohibiting one to pass on one’s assets before applying, the question becomes why one would not consider securing LTCI at some point before you either become ineligible or it’s cost prohibitive. My parents were children of the Great Depression, so saving pennies had been their mindset. My mom is currently in a nursing facility herself where the monthly expenses have now skyrocketed to $10,000 per month. She now also suffers from dementia and, knowing her, if she understood the monthly expense she is currently incurring, that expense alone would probably hasten her passing out of “aggravation.” My Mom has been in this facility for several years, so you do the math with regard to the impact on her dwindling assets. Eating up all of her savings over her lifetime has been a painful lesson for our family to observe and an ongoing challenge to my siblings and myself.

When my Dad’s condition worsened, but before he had to be institutionalized, my Mom by herself became unable to care for him. She resisted hiring home healthcare aids and wanted them all fired, since all they did was “Just sit there and do nothing!” Of course, the fact that they would help my Dad go to the bathroom or monitor his medications did not count. Yes, no matter how compelling the need, some clients will refuse to consider they themselves may likely need coverage some day, and by not securing same they will become a burden to their loved ones.

After the experience with my Dad’s deterioration, my siblings and I recognized that the time was overdue for us to stop procrastinating and secure LTCI. In our early 50s, my wife and I purchased the “use it or lose it” coverage basically thinking that since it was the least expensive we could manage the costs more easily than a large lump sum alternative. Unfortunately, LTCI carriers over the last decade have drastically underpriced their offerings and this has led to exorbitant rate increases. Clearly, existing policyholders of LTCI companies are at a time in their lives where they are either in or approaching retirement, so that price increases are received and perceived as price gouging and challenging to absorb on typically fixed budgets. The carrier my wife and I bought our policy from has had two significant increases in 10 years, the first one at 20 percent and, in September of 2021, an increase of 32 percent. The carrier, between these two increases, has also ceased writing any more business—so there is an expectation that this carrier has very little incentive to maintain their pricing, and the closed block will also suffer from adverse selection since those policyholders who, because of health reasons, would not be eligible to move to a more stable carrier will remain.

Many carriers have exited the business by not being able to adequately underwrite the risk and the list will continue to grow. What this says is that if those with the most expertise are unable to accurately calculate its pricing, clients without any of this research behoove themselves to secure suitable coverage sooner rather than later or before they find themselves unable to obtain coverage at all.

After a thorough review of the state of the industry, I moved forward in no longer recommending the use it or lose it option with the remaining existing carriers and considered the hybrid life and/or annuity investments that specialize in maximizing long term care funds the more practical solution. The carriers have similarly recognized the need is ever increasing and have developed long term care riders for some of their products, annuities that create a long term care pool of funds, and many other offerings in between. Some carriers have age limitations, e.g. below 70, while others have bonuses for those in better health. What is most attractive about these products is that the policyholder or his/her beneficiary will receive a return of some of, or all, or more than, their original investment, so the argument can be made that one is simply repositioning one’s assets and oftentimes leveraging them many times over into a long term care solution. Some carriers permit a transfer of qualified funds into the long term care chassis. Other carriers permit the 1035 exchange of cash values into the long term care product. It is obvious that the carriers are racing to develop true long term care solutions in vehicles that they can price with more clarity than the “use it or lose it” alternative.

Many carriers now offer payment modes over several years which may better accommodate the client unwilling or unable to make a single large out of pocket commitment. A factor to move forward is the policyholder recognizing that having to pay out of pocket for long term care expenses can rarely be perfectly timed since one does not want to have to liquidate an appreciating asset in a down market.

As a member of the baby boomer generation, with advances in medical care and likely being better informed on how to take better care of ourselves, we must acknowledge that the long term care need is not an option but a necessity.

Nothing contained within this article shall constitute legal advice and shall not create any attorney-client relationship.