Today we’re concluding the details of our recent retirement workshop.
If you missed the first two parts, I suggest you read them so you’re up to speed. See part 1 and part 2 to catch up.
So far we’ve made it through day 1 and section 5. Today let’s get rolling with day 2 and section 6…
Getting to the Second Class
We arrived early for the second class, found our seats, and chatted with a few other early birds.
All were older than us (early 60s) and lamented that 1) they didn’t know much about retirement planning and 2) hadn’t done much to prepare for retirement. Yikes!
I went through the regular round of familiar questions:
Them: What do you do for a living?
Me: I’m retired.
Them: How long have you been retired?
Me: Almost four years.
Them: You seem young to be retired.
Me: I’m older than I look.
Them: What did you do for a living?
Me: I worked in business and did marketing.
Them: Wow, that’s great.
My wife: We spent less than we earned.
Haha! Leave it to my wife to boil it all down for everyone.
At 6:30 pm the instructor (John) kicked off the class.
Of course it began with another pitch for the free Strategy Session. He encouraged us to set up a time to meet and discuss our personal financial questions and situations.
While we had waited for the class to begin, I looked ahead in our workbook and knew I wasn’t going to like this section much…
Section 6 — Protecting Against Market Loss
Before I get into what he presented, let me set the scene:
The market had just dropped off a cliff due the combination of the coronavirus and an oil war between Russia and Saudi Arabia, so the audience was panicked.
As noted, most were quickly approaching retirement age, had no idea what to do, had no savings so they were way behind, and the world was collapsing around them.
In other words, he couldn’t have picked a better night to cover this section.
John started with what he called the old paradigm of stock market investing:
- The stock market will always vindicate itself.
- “Buy and hold” is an appropriate long-term investment strategy during retirement.
- Diversifying your portfolio through proper asset allocation will protect your retirement against dramatic swings in the stock market.
Ok, so I was already primed for a fight after reading ahead and these three points didn’t help.
My take on them are as follows:
- I don’t think the stock market vindicating itself is an old paradigm. I think it’s a current one as long as you have a long-term time horizon. If you invest and need the money back in 30 days, then all bets are off.
- I think a portion of assets should certainly be buy and hold during retirement. You have to have some growth after all. Inflation can be a deadly enemy. I was surprised we talked relatively little about it over the two classes.
- Notice how point three is worded — it’s meant to be negative, especially “dramatic swings”. Yes, the market goes up and it goes down. That’s a fact of life. It’s always been that way. But it goes up more on average than it goes down. Sheesh.
Wondering what the new paradigm is? Here’s his take:
- The market is more unpredictable and volatile than ever.
- Buy and hold strategies may be incompatible with volatile markets.
- Asset allocation is no longer enough to protect against all the risks your portfolio may face.
- A down market at the wrong time may force you to postpone retirement indefinitely.
Not sure these are “new” but let’s go with it for now and explore what he wants to say in this section.
Next he noted that “in 2008 many investors lost between 30% and 50%.” Then he asked, “How did this happen when most investors had diversified portfolios?”
His answer: “True diversification only takes place when investors protect themselves against all of the investment risks that lead to market loss.”
This (naturally) leads to the question: What are “all of the investment risks that lead to market loss?”
Well, it turns out there are two (according to our instructor):
- Unsystematic risk: The investment risk associated with investing in a single company.
- Systematic risk: The risk inherent to the entire market or the entire economic system (like when the coronavirus breaks out, we have a recession, 9/11, credit crises, etc.)
According to the teacher, unsystematic risk is combatted through asset allocation and owning a variety of stocks.
But “no amount of diversification or asset allocation can protect you against systematic risk”.
At this point I had to speak up. I pointed out that he was using an example that focused on only owning stocks (in other words, not truly a diversified portfolio) — and that there were other asset classes like real estate that could help against systematic risk.
He acknowledged this was true, then moved on without another word. This line of thinking did not fit his narrative, so we glossed over it.
BTW, I think this was the only time real estate was mentioned in a six-hour class on retirement. I found that very “interesting”.
Now that he had us backed into a corner, knowing there was no escape from systematic risk (which we were all living through at the moment), he offered the solution: the Principal Protection Program (PPP).
Here’s how the workbook described the PPP:
One way to mitigate systematic risk is to consider incorporating a Principal Protection Program such as a Fixed Indexed Annuity.
BTW, there are a gazillion fine print words at the bottom of this page in the workbook, footnoted to the statement above. And well there should be…but let’s move on. The workbook continues:
A Fixed Indexed Annuity can be defined as follows: An annuity that allows you to off-load systematic risk to a large financial institution. Such programs link the growth of your portfolio to the upward movement of a stock market index without exposure to market loss.
Before he launched into details of the PPP, he said that we insure many aspects of our lives, so why don’t we insure our portfolios?
The unspoken answer was that we should! And it just so happens that this is what the PPP does!
He then noted that it’s much more likely we’ll need portfolio insurance than other types of insurance. The workbook included a chart with the following chances that a family would have any of the following incidents in a year:
- Loss of life: 0.9%
- Loss of car: 1.2%
- Loss of house: 1.3%
- Disability: 12.6%
- Loss of investments: 21.4%
So if we insure the other items, which were far less likely to happen, why wouldn’t we insure our money?
But wait, there’s more!
Next we moved to a chart showing if you lose X% in the market you need to gain X+% (more than the percent you lost) to break even. Oh the horror!
This chart was meant to show how terrible losing money is (as well as how hard it is to regain lost money).
Then he moved into the three ways to diversify your money:
- Emergency fund — Six months worth of income.
- Asset allocation — Used to mitigate risk in the portion of your portfolio you are willing to let rise and fall with the market.
- Principal Protection Program — Contribute the portion of your assets you’re not comfortable losing in the market.
The workbook listed the rule of thumb for how much to put in asset allocation versus PPP as “take your age, subtract 100 and contribute to asset allocation.”
I kid you not. Those are the exact words printed in the book.
I think they mean “subtract your age from 100 and that’s the percentage you should put into the asset allocation bucket.”
This matches the example they gave of a 60-year-old that should have 40% of his non-emergency fund assets in the asset allocation bucket.
Which, of course, means he should have 60% of his assets in the PPP.
BTW, a simpler way of saying this is that your age is the percent you should invest in the PPP. The rest then goes to asset allocation.
We spent the next 30 minutes diving into the type of annuity he recommended for the PPP. The key elements of it were:
- You invest money into the annuity for a given time period like 10 years.
- If the market goes up, the company takes the first 3% of gains and you get the rest. So if the market is up 10%, your investment goes up 7%.
- If the market goes down in any given year, your investment stays flat (no downside loss).
I asked if there were ANY other costs or fees other than the 3% and he said there was not, but I’m sure there are lots of “details” we didn’t get to.
There were many questions and lots of discussion about this, but the meat of what it’s about is above.
Anyway, we then moved on…
Section 7 — Retirement Distribution Pitfalls
We started this section listing the main three distribution pitfalls:
- Withdrawing money too quickly.
- Liquidating assets in the wrong order.
- Getting the wrong sequence of returns on your investments during the distribution phase.
Here’s what the book and instructor had to say about each of these:
- Basically we talked about a variety of reasons why 4% might be too much to withdraw (life expectancy, rates of return, etc.) He didn’t say it outright but the tone was that 4% was generally too much and a lower amount was better.
- Liquidating assets in the correct order can make a huge difference. It’s a complicated calculation but planners have software (that costs “about $1,000”) that can run thousands of scenarios to get your optimal answer. The book says, “The difference in orders of liquidation can sometimes stretch into the millions of dollars.” They then presented an example of a couple comparing “random” withdrawal to a “strategic” withdrawal. The difference was that the strategic option money lasted seven years longer and resulted in over $1 million additional spending after taxes. FYI, I’m not sure “random” really was random — it might be “worst case” to help prove their point.
- The sequence of returns part compared two different couples with the same return rates overall and who both started with $500k in assets. One had good returns at the beginning of retirement and the other had poor ones. The poor return couple ran out of money in 13 years. The other couple had almost $1 million at age 95. So how do you protect yourself against sequence of returns risk? Why the PPP of course!
By this time I was ready to throw in the towel mentally, but we were moving on…
Section 8 — Long-Term Care Planning
John began with the old paradigm for long-term care (LTC):
- Medicare will pay for long-term care expenses.
- Assets can be gifted away in order to qualify for Medicaid faster.
- Children can take care of aging parents.
- “I won’t end up in long-term care.”
- There are only three ways to mitigate LTC risks: self-insure, rely on family members, or buy expensive LTC insurance.
But there’s a new paradigm! It contains the following:
- The national average cost of LTC is $7,441 to $8,365 per month.
- 70% of retirees will need LTC at some point in retirement.
- Medicare does not pay for LTC.
- Medicaid only steps in when you’re broke!
- The Medicaid look-back period is now 60 months (5 years). Any assets you’ve given to someone else in the past five years can be claimed for Medicaid payment.
- LTC can destroy a lifetime of savings before it reaches the next generation.
- Children are often incapable or resentful of taking on LTC duties.
- Expensive LTC insurance is no longer the only way to safeguard against a LTC event.
I was in the midst of researching LTC for a series on ESI Money, so I saw one glaring error in the above. Everything I had seen said the chances of needing LTC were 50/50. In other words, 50% of people would need LTC eventually, not 70%.
I asked the teacher if the URL at the bottom of the page (this web page) was the source for the 70% and he said it was. But when I visited the page the next day, it didn’t say anything about the percent of people who need LTC.
We next spent a few minutes on the Medicaid spend-down rules, how you can’t have more than $2,000 worth of “countable assets”, and that your spouse is left with a pittance as well.
So what are the options to pay for LTC? The choices net out to these:
- Plan to pay the costs yourself.
- Ask your family members to take care of you.
- Purchase a traditional LTC insurance policy.
- Purchase a life insurance policy with LTC features.
Take a wild guess at which one he recommended…
We spent the next 15 minutes or so covering how:
- Only the very wealthy can self-insure.
- Your family probably won’t want to or be able to care for you (I told my wife they probably would for $100k per year — the cost of LTC above — Haha!)
- LTC insurance policies are terrible. Either you pay for it and don’t use it or you do need it and the insurance company will fight you tooth and nail before they give you anything.
- That’s why buying a life insurance policy with LTC features is the best option.
I asked him what he thought the amount was before you became self-insured.
He said it depended on how much you spent. This was kind of a fair answer, but also I think he was trying to dodge the question.
Yes, if you live in a swanky LTC facility you’re going to need more. But he just told us the average cost is $100k per year, so certainly he could estimate what you’d need in assets to cover that.
He did say, “If you need $20k per month to live on like one of my clients, you’d need $3 million.”
He said it as if $3 million might as well have been $3 billion — it was just not a realistic number for people to acquire — it was too high. LOL!
By this time it was 8:15 pm or so and the workshop was over. He gave us a ten minute break and then said we’d come back for the final exam.
Ugh…
The Final Exam
During the break I tried everything I could to get my wife to leave.
Why did I want to stay and take a test based on what he had shared? What would the benefit be?
And I asked her, “What answers does he want anyway? The ones he gave us or the right ones?” Hahahaha.
But she noted that she’s a “finisher” and thus we were there to the bitter end.
The final exam turned out to be both better and worse than I imagined.
It was better because it was a group conversation with slides at the front.
It was worse because the “exam” was simply a rehash of what he’d taught us, much of it meaningless to financial planning today. Why did we need to cover the year Social Security was created, what the highest marginal tax rate was in 1945, and who said this or that in 1980 about the federal deficit? What did these things do to help anyone plan for retirement today?
I’ll tell you why we covered them though — because they fit his sales pitch.
He also hand-selected numbers, time frames, comments, etc. that supported the story he wanted to tell.
Later in the car I told my wife that we used to say “figures lie and liars figure” at work because you could make numbers say almost anything if you had enough skill. I told her, “I built my career on making numbers say whatever I wanted them to say.” LOL!
Ok, it wasn’t that bad, but it was close at times.
Anyway, we had to endure an hour commercial for basically why we were all doomed without some sort of professional help (never said this outright but it was very much implied). It was brutal.
There were three points he made during the exam that are worth calling out from the rest.
The first was his example of how a couple could get to zero taxes in retirement and a corresponding comparison between their results and what would have happened if they had paid taxes. Spoiler alert: their finances were much better off assuming zero taxes.
The second was an entirely new concept. I found this interesting in that we were learning about something new during the final exam. Isn’t a final exam to test knowledge of something you’ve already learned?
Anyway, he introduced the concept of a Life Insurance Retirement Plan (LIRP) which he explained as permanent insurance with a LTC benefit. It’s designed to give you “as much savings as possible with as little death benefit as possible to mimic a Roth IRA.” John said it is a good option for those who can’t use a Roth.
As I look back, this is likely what the financial advisors we met with were proposing since they used almost the exact same words: “insurance designed to maximize savings with as little death benefit as possible.”
If you want a bit more on LIRPs, here’s a summary:
If you own a whole life insurance policy — or any other type of cash value life insurance — you can use your life insurance policy’s cash value to supplement your retirement income. This is known as a life insurance retirement plan (LIRP).
Some insurance agents tout this option as a major advantage of cash value life insurance. But while cash value policies sometimes offer flexibility in retirement planning, cash value life insurance also comes with risks that all life insurance shoppers — particularly those approaching retirement — should know about.
In some circumstances, a life insurance retirement plan can offer additional flexibility. Like a 401(k) or IRA, the cash value of an insurance policy is tax-deferred, but a cash value policy also has the following advantages: 1) There is no limit to how much money you can pay into a cash value policy, while 401(k)s and IRAs both have annual contribution limits. 2) Whole life insurance and certain other types of cash value life insurance often guarantee a floor for returns. That means that you won’t lose money during a market downturn. 3) There are no age restrictions on accessing the cash value of a life insurance policy, whereas you’ll pay a penalty for withdrawing money from a 401(k) or IRA before age 59½.
There are several reasons why relying on cash value life insurance for retirement isn’t recommended for most people: 1) Cash value policies can be prohibitively expensive. 2) Accessing the cash value is complicated. 3) You’re likely to get better returns on other investments.
The third was a statement that summarized much of the course (and was what the planners we met with also said at their event): “Taxes are now on sale. They will go up later.”
This meant that we need to do something to pay taxes now (while on sale) and avoid them later (when they are pricey).
Of course he ended with one last pitch for the Strategy Session, this time mentioning that if we signed up we would also get a free book.
He also added that when anyone came in for a Strategy Session he would run an analysis showing the impact on retirement savings using three scenarios:
- Taxes stay the same as they are today
- Taxes increase dramatically
- Taxes are at 0% (based on making the right moves)
Hmmmm. I wonder which one will look the best?
Our Discussion
Anyway, that was the end of the class and I beat it out of the room quickly. As we drove home we chatted about the workshop.
My wife thought he generally made some great points though she admitted she didn’t understand everything and how it all fit together.
I was a bit more jaded (I know, a shocker) and told her I thought he had presented us facts and details designed to lead us down a path — which was that we needed his help to make the most of our retirements.
Therefore the entire thing was a sales presentation for his services, something he said it was not several times during the workshop.
As I said previously, I’m fine with him “selling” us. After all, we went into this knowing that he had to get something out of it.
But don’t tell me it’s not a sales presentation and there’s a non-profit behind it who just wants to educate people on finances. That insults my intelligence.
My Thoughts
So, what do I think about the two-day, six-hour workshop? Some takeaways:
- I’m glad we did it as I’m always looking for new perspectives. I want to know what’s “out there” these days and the only way to know for sure is to get out and try it. Plus doing so gives me some experiences to share here.
- I didn’t learn much that was new or useful. Maybe I missed it and you can tell me what it was.
- It did make me think about taxes (and having a Roth) and portfolio protection. Does anyone have anything like the PPP? If so, how’s it working for you?
- The estate planning section was the most valuable and one we’ll probably take action on.
- For all the grief I give financial planners, it’s likely that people who don’t know anything about money will be better off if they use a planner. Of course they have to find a good, honest one and then actually do what she says (both of which can be hard to do), but if they do my hunch is they’ll be better off than if they try to figure it out on their own. Talking to the people before the class showed me that there are so many out there who know almost nothing about money and are doomed if they don’t get help (and for some reason they won’t read/educate themselves.)
Anyway, that’s the saga of our retirement workshop.
Has anyone been to anything like this? If so, what did you think of it?
I’d like to see what your take on futures or options are with respect to hedging or shorting the market. During the protecting against market loss segment this presenter is apparently alluding to the idea that these annuities are the only way to protect against downside loss but that totally is not true.
First of all there’s counter party risk: what if the insurance company explodes?
Second of all, one can buy put options with a known cost (that you can be forced to take as a loss if things go up) to get the equivalent downside protection. This clearly requires far more hands on investment than a buy and hold strategy but during periods of volatility it can provide serious gains, especially in a down market overall. You can do the same thing with futures but the taxes are more complicated since futures are mark to market.
My father converted his Roth IRA into a PPP about a year ago without even consulting me about it. I was not too happy that he did that, because he has enough passive income that he doesn’t need the funds in the Roth, but he is in his 80’s and it lets him sleep. The terms of his are the following:
1. Indexed to the SP500.
2. Max gain = something like 6.4%. They keep everything over that.
3. Min gain = 0%. If the market goes down you get none of the loss.
This might seem decent but it really only works out to decent returns if the market were to return 6% every year. That rarely happens.
If you consider a market that returned 6% every year for 4 years you would turn 100K into $126,250. More typical returns that would total to the same amount without the PPP might be something more like this: this: 10%, 20%, 2%, -6%. Under the PPP that would result in returns of $115,470. A 26K return vs a 15K return. Pretty hefty difference.
Of course the PPP shines in a down 30 or 50% scenario such as we are in right now. However since my dad did this a year ago he missed almost all of the 30+% return the SP returned last year so he is only back to even.
The PPP is trading long term returns for short term certainty. There is always a trade off. If you absolutely cannot stand any kind of loss perhaps it is worth the trade off.
I would much sooner build enough passive income that I don’t need the short term certainty. He has exactly that, but his nervousness about loss still can’t handle the volatility. I have seen that often in older people. My father-in-law is showing signs of the same thing.
I am trying to be cognizant of that feature of old age and try to prepare my self both mentally and financially to not succumb to those emotions when I get there, which might cause one to trade performance for excessive safety. Trading a little performance would likely be prudent. Trading nearly half the performance for safety might be a little much however.
Thank you for taking the time to subject yourself to this “education.” The 3-part series was certainly enlightening. I am glad you put in the 6+ hours to attend and even more time to write up the whole experience for me to read in 20 minutes.
Saves me a lot of time and satisfies a curiosity. Gotta love the “this is not a sales pitch” sales pitch. Good grief.
Cheers!
-PoF
As we all know, nothing is free. ANYONE spending that much time “for free” to teach you isn’t teaching… he’s selling.
My biggest issue with all of this is the non-profit angle of the materials. The people running the non-profit are profiting off people getting suckered in many cases, and they’re helping life insurance salesmen to profit by using a non-profit angle. The whole loop stinks. Why are so many people in this world OK with con-games. (PoF, it always comes back to my movie recommendation of “House of Games” — just knowing cons exists helps one be more skeptical)
“Figures lie and liars figure.”
First thing I learned in accounting: Debits on the left and credits on the right.
Second thing I learned in accounting: Q: “How much is 2 + 2 ?” A: “How much do you want it to be?”
Exactly! We are seeing it now even in this coronavirus crisis – mortality statistics, projections, masks needed, etc. Stated numbers always support whatever message the article or speaker is trying to send. What a coincidence…
Thanks for taking the time with this – I enjoy your detailed summaries, and the feedback of your readers. I’m getting many perspectives to consider when managing my own retirement plans….
FWIW, we purchased 2 annuities last year as part of our portfolio diversification and “PPP”. Neither my husband nor I have a pension available from our employers, and we wanted some form of guaranteed income in a worst case scenario. We did buy indexed annuities, but are not fooling ourselves that any of those “illustrative” returns will ever come to fruition. We found a product from what we feel is a solid insurance company (the annuity is only as good as the insurance company behind it), offering us a contractually guaranteed 7% compounded annual return for the first 10 years. COMPOUNDED – this is the only annuity product I’ve ever seen offering a compounded return rate – most offer simple return rates. We based our decision on what the annual payout would be based on the guaranteed return – anything more is gravy. When we turn on the income stream, we will have at least enough to cover our bare bones essential expenses – which is exactly what we bought them for. We basically purchased our own personal pensions (and from what I understand, that’s what companies are doing for their pensionable employees nowadays – purchasing an annuity at the employee’s retirement). I’m comfortable with this decision.
That being said, I would NEVER EVER EVER put more than 25% of my invested portfolio into such products – we actually only invested 10% (it’s a balancing act – 5% wouldn’t provide enough guaranteed income to cover expenses in any meaningful way, but >25% is too much to lock away permanently, trading cash now for future income). They are expensive, irrevocable, and full of small print – and sold by insurance companies, which I am loathe to deal with in the first place. My advice is to only consider if it’s a necessary element of your overall retirement plan, and when shopping for one, only look at the modeled payments are shown on the “Guaranteed” page of their proposal to see what you would realistically get out of it.
Food for thought: don’t look at annuities as PPP “protection” from market losses – the very fact that they are indexed to the market keeps them subject to that systematic risk (simple immediate annuities are not the same, so could be an alternative). Think about them as another layer of diversification – and look where you can diversify your overall retirement strategy outside the market (e.g. real estate, etc) – that is truly getting away from systematic risk.
LTC insurance is a whole other loooong conversation 🙂
Hahaha! I have a LTC insurance series coming up later this month…
LOL – timely….that should generate a lengthy discussion in the Comments. I look forward to it!
While reading your series on retirement workshop adventures with interest, I noted that several of the salespeople warned that the government could raise tax rates substantially in the future. Normally I would think they’re exaggerating to sell a product, but these days one can’t be blamed for thinking that future raised taxes ARE more likely, with the tremendous bailouts and groaning entitlement programs of our suddenly very challenged economy.
My husband and I are currently self-employed writers and speakers, age 59 and 62, and have had a good 5+ months of revenue now wiped out by canceled engagements due to The Great Pause. So we know we’re going to have an unexpected low-income year. Low-income year combined with the specter of raised future taxes by the time we start drawing down our trad’l IRAs 7 to 10 years from now, are making me think that conversion of a bulk of our traditional IRAs to Roth IRAs in 2020 is worth an in-depth pro-and-con conversation with our CPA. Well, when her frantic tax prep season passes… whenever that is these days. Meanwhile, if anyone has any hard-earned tips re: Roth conversion, I’m all ears. (Sorry to take this comments thread a bit off track, ESI.)
Hi ESI. Maybe a future article idea but I’d like you to expand more on your comment around Real Estate helping against systematic risk. As they say, we are in “unprecedented times” but what happens when 50%+ of your tenants stop paying rent as a result of job loss from Covid-19? I’ve really enjoyed your take on real estate but I’m very happy right now that I haven’t taken the plunge. That would add a lot of stress considering my own job may be at risk soon.
Systematic risk: The risk inherent to the entire market or the entire economic system (like when the coronavirus breaks out, we have a recession, 9/11, credit crises, etc.)
According to the teacher, unsystematic risk is combatted through asset allocation and owning a variety of stocks.
But “no amount of diversification or asset allocation can protect you against systematic risk”.
At this point I had to speak up. I pointed out that he was using an example that focused on only owning stocks (in other words, not truly a diversified portfolio) — and that there were other asset classes like real estate that could help against systematic risk.
In his example, “systematic risk” meant “systematic stock market risk.” He was focusing on things that only negatively impacted the stock market, so I pointed out an asset class that was not the stock market and can (but not always) move independent from it.
Now if you want to consider an example of a systematic risk where nothing is safe, then his solution is not safe either. After all, companies that hold those sorts of policies could collapse and pay nothing if you want to assume an all out crash of everything.
In a worst case scenario, at least I could live in my rental properties. 😉
I think the key message is (or at least my key message): have several margins of safety and many streams of income. I’ve written on these here:
https://esimoney.com/key-early-retirement-margin-safety/
https://esimoney.com/multiple-streams-of-income-helping-you-get-to-financial-independence-and-beyond/
I think these things are always a crap shoot and completely dependent on the instructors. I actually was taking a community college three session class (three Sat for two hours each) in elder law and asset protection, last session was interrupted because of COVID-19, but the first two sessions were really more of a class. NO mention of anything post class, lots of straight up information and just what is out there, what does it mean, what are pros and cons, etc. with a large focus on Medicare and Medicaid and long term care. That said, since many of the strategies are going to require a lawyer (setting up trusts, wills, etc.) they don’t have to “sell” you on using them. You’re going to need a lawyer, he seems like a nice guy, who are you going to call? Same with the financial guy, strategies to minimize problems with Medicaid look backs, here are some pros and cons for things like reverse mortgages and trusts, etc. Very laid back, but the bulk of people in the class are going to need some help with setting some of the strategies up, instant clients. He sent out an email and offered a free session with all the folks in the class, over the phone given the current situation, which I’m sure would have been mentioned in the final class near the end. I liked him, I’m curious, and I’ll probably set up a session with him over the phone. I will say I expect the last class would have had something in it on annuities and likely “PPP” based on the course outline, but given the other material I suspect it would have been pros and cons and I am now curious how they would have talked up the pros in class.
Thank you for the excellent summary of this and the previous retirement workshops you attended.
A few questions you did not ask the presenters that may have been helpful.
1. Do you at all times act as a fiduciary with those people you provide services?
2. If you do not act as a fiduciary at certain times, do you advise when you are not acting in that capacity and disclose all compensation you might receive from the options you are asking people to consider? If not, why not?
With regard to the PPP type products:
3. What is the range of commissions paid for selling these products and what is the typical commission paid for those you suggest people consider?
4. What is the index used for these PPP type products? Is it public or private? Is it price only or does it include dividends?
5. How are any distributions from the PPP type products treated for income tax purposes, ordinary income, qualified or non-qualified dividends, capital gains, short or long term, return of capital, other?
I suspect most presenters at these type workshops would not fully answer these and many other questions, at least not in front of the whole group and mostly likely not in a private Q&A meeting.
As you said regarding the presenter’s answer to you pointing out there were more asset classes than just stocks, these type questions would not fit his narrative/sales pitch and the presenter would want to move on.
There wasn’t much time to ask questions and certainly not enough for detailed responses.
Any time someone did ask a specific question like these, the teacher suggested we schedule a private meeting to cover them.
All seem to me fairly direct questions taking only Yes, No, or a few word direct answers, especially if the presenter is being straight with the students.
Perhaps ask as part of the Final Exam questions, with the students giving the exam for the presenter.
Hi Ron, I have a “PPP” product, and as I researched it, I can tell you they are not questions that can have a straight answer –
1. Do you at all times act as a fiduciary with those people you provide services? — The presenter could answer that question directly, but when you are shopping, it depends whom you purchase it from: if your engaged advisor, maybe yes; if a salesperson (you met at a seminar LOL), maybe no – unless you established a relationship with them.
2. If you do not act as a fiduciary at certain times, do you advise when you are not acting in that capacity and disclose all compensation you might receive from the options you are asking people to consider? If not, why not? — Our advisor did disclose everything when I asked him. I independently researched commissions of other products, and did learn he earned less than he would have selling me a different contract. Does that make him still a fiduciary? I don’t know – but I think that whole fiduciary ‘disclosure’ is bull. I doubt you can be sure anyone would honestly answer that question to a client – cause if they’re crooked enough to sell you a crappy product just because it generates the most commission for them, why on earth would they be honest enough to tell you they don’t act in your best interest??
With regard to the PPP type products:
3. What is the range of commissions paid for selling these products and what is the typical commission paid for those you suggest people consider? — They are all over the map, generally 4-7% from my independent research. (you can find out for almost any product with some diligent internet searching)
4. What is the index used for these PPP type products? Is it public or private? Is it price only or does it include dividends? — My one single contract had 2 parts of 4 different indexes. So no way to simply answer that one for the myriad of products out there.
5. How are any distributions from the PPP type products treated for income tax purposes, ordinary income, qualified or non-qualified dividends, capital gains, short or long term, return of capital, other? — It all depends on how you define the contract: IRA, 401K rollover, after-tax, etc. So again, not easy to answer simply in a seminar.
Hope that clarifies a bit for you.
MI14, thank you for providing you experience and clarifications.
I am more hands on and self-taught than most that attending these type presentations, but do usually enjoy the free dinners. As ESI mentioned, he was typically surprised that most who attended knew little about the basics of money and investing.
Back to my point, the questions are asked of the presenter to get an indication of the motivation and interest of the presenter, not as a means for thorough evaluation. I would be reluctant to see the presenter for a follow up meeting if the presenter could or did not answer my questions directly.
You consulted your advisor and he did disclose everything when YOU ASKED. I believe my first two questions can easily be answered directly by a presenter, although they are probably loath to do so. A fiduciary is to act in your best interest at all times, a straight yes or no answer. Of course, an advisor may be concerned about legal consequences if later the client learns that the advice was not the best and resulted in more compensation than the advisor would otherwise receive if the advisor had only considered the clients best interests. From my perspective, what you did was prudent but not relevant to asking basic starter questions of a presenter at a seminar to determine whether a follow up meeting would be worth the time and effort of a meeting and to do independent research.
For me, I would prefer an advisor that charges fee only for the time/advice provided, and fully and freely discloses all of the advisor’s forms of compensation the advisor may receive from the suggested products.
I understand the commissions on PPP products are all over the map and can be more than your 4-7% range, upwards to around 10% for some. The more disadvantageous for the client, the higher the commission is likely to be, in my opinion. Still, a presenter should be able to give a range for the commissions of these type products and a much narrower range for the products the presenter might suggest. But, again they are probably loath to do so.
What is the index used for these PPP type products varies by the product/insurance company issuer. You seem to have a contract with a private index, a mixture of 2 parts of 4 different indices. I suspect all parts and each index is price only without consideration of dividends. Again, to me a very direct way for a presenter to answer the questions, but is probably loath to do so.
The presenter could also answer the tax treatment question directly. There would be no capital gains or qualified dividends treatment. All actual income would be considered ordinary income for income tax purposes when distributed or paid to the individual, except for those held in Roth type vehicles. And, unless there is an insurance type rider, typically the principal is forfeited upon death before completion of the contract term [I’m not on firm footing here, but suspect it is true in may instances]. But, since the presenter is selling a riskless type investing via an insurance, not an investment, product, the presenter again would rather not address these aspects with direct answers.
As usual, buyer beware. The intent isn’t to provide a free lunch or dinner, but to sell something to most or many if the attendees.
Agreed on all counts – the presenter COULD give a direct generic answer (commission ranges, general tax treatment categories, etc), but would be loath to do so. I suspect probably because if he/she did, somebody in the audience would hold them to that number and they could get into trouble later. I did mention the presenter should have at least answered the first fiduciary question directly – and I meant my advisor disclosed that he was a fiduciary when I asked him, not that I had to ask him about everything we talk about in our relationship.
Sorry I did not realize you were speaking strictly about the class/dinner/seminar scenario. In the vast majority of those seminars, the presenter doesn’t want to give direct answers since they can vary so much for the client (even your comments show a ranges of possibilities, thus “it depends”). Plus, they naturally want to push for the next step, a personalized meeting where I’m sure the sales pitch really starts in earnest.
Good to know that we are on the same page, MI14.
In addition to the presenter being concerned that somebody in the audience would hold them to numbers, causing trouble later, I suspect that they do not want the general audience to be even aware of those type questions. While I would ask these questions to decide if I even want a next step meeting, I suspect these are not question that come to mind to the general audience. So, though not the purpose of me asking the questions, the questions may prompt the general audience to ask them and follow up ones in the personalized next step sales pitch meeting — something the presenter probably doesn’t even want to address in detail in those meetings.
You stated “I think that whole fiduciary ‘disclosure’ is bull.” I agree, it can be if the audience member is expecting to be led by faith in the term without critical questioning.
If I brought up these Equity-Indexed Annuity type options to a truly fiduciary type advisor, I would expect the advisor to ask me what is the purpose or goal I would expect this type product to serve in the context of my overall financial and investment plan. I would also expect the advisor to suggest that, in addition to the “PPP” type option, that I might wish to consider alternatives that could serve the same purpose and achieve the my goals, perhaps with greater reward and with less costs and disadvantages.
That was the approach I took in a follow up meeting with the presenter at a dinner [nice dinner, even if I had to pay for my own wine]. The presenter suggested this type product as an alternative to the fixed income allocation in my overall financial plan and investment approach. I concluded I could do just as well, if not better, at less cost, more to complete liquidity without exposure to surrender charges, and more advantageous income tax treatment than any of the products being offered for consideration that measured their index like returns over various the time frames.
For example, I subscribe to a quarterly data base of various measures of most commercial indices, ETFs and mutual funds — data source Morningstar, software with data from another source. I just screened the database as of Mar. 31st. I got over 105 options for investments in asset allocation, equity and fixed income products. All are open to new investors in initial amounts of less than $100K; all performed consistently in the top 25% of their category/sub-category in each of the last 1, 3, 5 and 10 years, with expense ratios not over .70% and with no front or back end loads and no or only short term redemption charges. Each has consistently produced returns over the last 3, 5 and 10 year periods in excess of what typical “PPP” products offer. Most have had positive returns in each of the last 10 calendar years [or only minimal negative returns in 1 or 2 calendar years], positive returns over the last 12, 9 and 6 months, many with positive returns over the last 3 months and even the last month.
While I do this myself, I would expect a fiduciary advisor to offer me these type options as possible alternatives to a “PPP” type product. Then, if still was set on a “PPP” type product, I would expect a fiduciary advisor to evaluate and offer for my consideration those “PPP” type products that the advisor believes are in my best interests, and why the advisor believes this.
So, I believe designation as a fiduciary does not necessarily need to be bull, but you do need to know a bit about what they want and why, and ask critical questions, to determine if the fiduciary is actually acting in your best interests.
Thank you, MI14. I enjoyed this opportunity to discuss approaches in more depth.
And thank you Ron – it’s interesting to see others’ perspectives.
Regarding the “bull” fiduciary concept – I meant in the fact that to the general public, the ‘experts’ tell you to “make sure they will act as a fiduciary”. Now most on this channel know the kinds of questions to ask to make that assurance, but as ESI pointed out, so many of those in the seminar audience know so little. They won’t ask those critical questions – I suspect they would ask “would you act as a fiduciary?” and take the response (duh, YES) at face value. I feed bad, because so many get taken advantage of because they don’t educate themselves enough to protect themselves….OK, rant over.
On a bright note, regarding the PPP product…that’s exactly what our advisor did – we had an hour discussion on our goals and current situation, and he asked specifically what I would be looking for in an annuity or other investments. Then he came back with a choice of 2 products and explained why he thought they would fit our needs. I challenged him on several points, but he had answers – in the end I was very satisfied. We had met with 3 other people, who all offered a single very well known product to us because “it’s the best on the market”. What a coincidence, they also offered the same product to my sister – who is 6 years older than me, already retired, not nearly in the same financial position as me, with high adversity to risk > nothing was the same about our goals. Hmm, think the commission on that product was several % higher than the one my advisor offered me? I’ll give you one guess…
I’m still suspicious of every finance advisor out there, fee-based or not – but it’s nice to get confirmation from another viewpoint that at least I did my due diligence, and that he (perhaps) really did act in my best interest. I still do not regret purchasing those annuities – with retirement looming in a year, I’m happy to have locked in guaranteed 7% compounded return annually – and not worry about any surrender charges since it’s a small portion of our portfolio, but will contractually guarantee us a fixed income for our lives. (And I combed through that contract, believe me LOL)
MI14, congratulations on your soon to be retired status. I’m in my 27th year of retirement hoping for at least a dozen more to match or exceed my father’s longevity.
Everyone’s situation is different. It seems you’ve done your due diligence and the advisor you use did seem to act in your best interest. Your financial future seems relatively secure.
With a decent fixed pension, at least it was 27 years ago but with no COLA, Social Security for almost the last 10 years now, no debt, and adequate reserves, I’ve been able to satisfy my needs and reasonable wants without taping investment assets. Biggest problem now is how best and efficiently to pass on what I’ve accumulated to 3 adult married children, 7 biological grandchildren, 2 informally adopted grandchildren, 2 great grandchildren and counting. I would like it to provide them security, foster positive values, and last and and grow for a few more generation to come. Hopefully, it will provide them all an example and outline of what they may wish to consider when they reach my age.
Live long, prosper and promote learning and common sense.
> If the market goes up, the company takes the first 3% of gains and you get the rest. So if the market is up 10%, your investment goes up 7%.
First 3% of the gains, or first three percentage points? Because in your example, 3% of 10% is 0.3%, meaning the investment would go up 9.7% – not 7%.
If it’s the first three percentage points, I wonder how it would work if the investment went up, but less than 3%. Would you lose money in this scenario?
If the market goes up 10%, they get 3% and you’d get 7%.
FYI: Their source for the 70%-will-need-LTC statistic was presumably Genworth’s Cost of Care Survey at https://www.genworth.com/aging-and-you/finances/cost-of-care.html (“7 out of 10 people will require long term care in their lifetime”). It was cited in the first paragraph of the web page article the workbook/presenter cited. Of course the workbook/presenter was technically incorrect — should have cited the underlying source explicitly.