Brent Meyer is a wealth brokerage owner, publisher, and owner of SafeMoney.com, a national financial education center on safe retirement strategies. We had a chance to speak with Brent about annuities, life insurance policies, and the importance of retirement planning for longer lifespans.
Tell us a bit about yourself. Why did you decide to start your website?
I have been in the financial services industry for over 15 years. My background includes being a marketing director through a business unit of Allianz, a senior executive of an insurance marketing company, and a publisher on safe financial strategies.
These experiences have been eye-opening. What I have seen is that consumers need an “open book” to retirement planning – information that is unbiased, practical, and clear. So many people are confused about what they need to do in order to retire happy and comfortable. For that matter, many brokers don’t explain to them the importance of having a strong financial foundation for retirement.
As a financial educator, I help people understand that retirement is about income, lifestyle, protection, and risk management – not the accumulation of assets and investment growth! And it’s important for retirement investors to have an advocate in their corner.
That’s why I started SafeMoney.com: to be a source of financial education and clarity for everyone. Our goal is to help people understand that retirement planning should focus on setting lifestyle goals, securing reliable income to pay for them, and creating protections so their money lasts as long as they need it.
What are some of the biggest myths that you hear these days regarding retirement funds and plans?
One interesting observation is regarding people’s retirement readiness. Many investors are diligent in planning for their futures. They have exercised discipline, built up savings in 401(k)s, IRAs, and other retirement savings plans, and accrued a sizable nest egg. Since they have taken these proactive efforts, they think that they’re ready for a financially comfortable retirement. However, those plans may not be as “retirement-ready” as they think. People are living longer than before. Do their plans account for the risk of longevity?
As you live longer, other risks take on more weight. Inflation eats away at your buying power, the market is more likely to correct, costly health needs arise, and your chances of running out of money multiply. Your retirement plan may not provide you with guarantees or protections against these risks, especially over time. So it’s important to ensure that your finances are truly “retirement-ready.” Does your plan give you guaranteed lifetime income for your basic living expenses? Is it optimized to reduce or eliminate taxes as you take withdrawals? Do you have effective protections against when the market nosedives? Do you have suitable liquidity strategies in place in case you need long-term care or other care services?
Another observation is the bias toward fee-based planning. Even though commissions may pose a conflict of interest for financial professionals, so can fee structures based on account or plan asset values. With recurring revenues coming from fee-based compensation, advisors can make recommendations that keep money in fee-generating accounts. In fact, Morningstar has found that fee-based accounts can yield up to 60% more revenue for financial companies than commissioned-based accounts.
If someone were to say to you, “I don’t like investing in annuities because they’re too complex,” how might you respond?
If someone says this, they might not have been shown how annuities can fit into their portfolio. Or they may be working with a broker who doesn’t offer or sell annuities. It’s likely that the broker was never taught about annuities, perhaps because their training company saw more profitability in fee-based accounts. That isn’t necessarily a bad thing, but it does leave the consumer with fewer options that could truly help them.
I would say that annuities aren’t an investment, but rather a transfer-of-risk strategy. They aren’t designed to generate returns, but rather to protect and safeguard your financial well-being with their contractual guarantees. They should be used as part of the foundation of a retirement portfolio – not as investment vehicles!
Name one effective wealth creation strategy, tactic, or financial instrument that many people might not be aware of.
Say someone is contributing to their 401(k) and some IRAs. If they’re maximizing their contributions, a fixed index annuity can be another source for tax-deferred money growth. Under the tax law, annuities don’t have contribution limits. This type of annuity is linked to an index like the S&P 500 price index. It credits interest based on a percentage of index growth. It may be another tax-advantaged savings option for people who are especially averse to financial losses. As someone nears retirement, however, a transition toward a guaranteed income strategy or strategy for other guarantees (like those provided by the annuity) will be advisable.
For those looking to minimize taxes in retirement, a cash value life insurance policy offers tax-free income via policy loans or withdrawals. A financial professional who understands how cash value life insurance policies work and are structured can help you plan an efficient savings and distribution strategy.
What’s the difference between universal life insurance and indexed universal life insurance? Under what circumstances would each type of policy be appropriate?
Indexed universal life insurance is built on a universal life chassis. So universal life is a permanent policy that offers premium and face amount flexibility. The cash value is determined based on current interest rate assumptions. When interest rates are high, the cash value performs better, and vice versa. Indexed universal life insurance works in the same fashion, except the cash value is determined based on an index – again, like the S&P 500 – instead of the current interest rates. So you have greater potential for cash value growth.
There is a “cap,” or preset maximum limit, on the credit to your cash value that you will receive. This is usually 10% – but there’s a trade-off. The cap is designed to be able to provide a “floor,” or a guaranteed minimum crediting rate of 0%. This is to protect your cash value against losses when the index falls in value. So if the index tanks one year, for example, you are guaranteed not to be credited less than 0% for that current crediting period. In other words, you will “never lose a dollar on the down days.”
What are some of the most common mistakes that people make when it comes to estate planning?
One common mistake is putting off estate planning to a later time. According to Hearts & Wallets, 58% of Americans struggle with estate planning along with retirement planning and investment decisions. It’s no surprise since many people simply don’t feel the urge or want to deal with the uncomfortable topic of end-of-life matters. But proactive planning sets up an efficient, tax-advantaged wealth transfer for beneficiaries later on. Making estate decisions early on can also bring clarity to other post-retirement goals you may have.
Another common mistake is not thinking about the effect of taxes on an estate. Remember, an estate can be subject to taxation at federal and state levels! If taxes are left out of the picture, they can take a big slice out of your estate’s value. An efficient solution is using life insurance to transfer wealth to loved ones. Life insurance provides instant liquidity and can cover the estate taxes so you ensure your heirs receive the full estate. Be sure to obtain more-than-adequate coverage, as insufficient life insurance coverage is a common misstep.
Do you have any guidelines (or rules of thumb) about how much money people should set aside for the possibility they might need long-term care?
If someone requires care in a nursing home, the average cost is about $4,000-$6,000 per month, or as much as $48,000-$60,000 annually. If someone requires in-home care services, a home health aide or nurse can be about $100 per day or around $3,000 per month.
It’s estimated that several Americans may have some future long-term care requirements. According to the U.S. Department of Health & Human Services, someone turning age 65 today has an almost 70% chance of needing long-term care sometime. So it’s vital to start preparing early by setting aside funds for these risks now. Unfortunately, many people end up liquidating their assets just to cover the cost of care they need. Many even end up on Medicaid.
When creating an income plan, include these expenses in your year-to-year budget projections. Inquire about strategies that enable you to pay for care needs and that don’t erode your retirement or legacy wealth. Some life insurance products will give you this financial flexibility. A life insurance death benefit can be accelerated income-tax-free to use for chronic care, so long as the person receiving the care has trouble performing two “ADLs,” or acts of daily living. Accessing this “living benefit” of your policy will enable you to keep more of your retirement income and legacy dollars intact.
Do you expect any significant changes in retirement funding principles or practices over the next decade or so? Or will it remain basically the same as it has this century?
The U.S. stock market has been reaching all-time highs and interest rates remain low. One possibility is that we have reached a “new normal,” where the current interest rate schema may remain for years to come. Bond values continue to be trading low, which is one indicator we may be in this environment for a long time.
With these economic conditions and a shortfall in U.S. household retirement savings, Americans will face more pressure to “stretch” their retirement dollars for as long as possible. Life expectancies are likely to increase, so retiring Americans will be at even greater risk of longevity and its accompanying effects. As financial professionals help Americans prepare for these possibilities, I believe we will see a transition in retirement funding principles toward greater use of annuities for the benefit of guaranteed lifetime income.
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