Bob Seawright: The Annuity Imperative

Bob Seawright joins Coach Pete to discuss his article The Annuity Imperative. Recorded in October 2011, the conversation considers annuities, retirement income, and the value of understanding a product before making a financial decision. Call 800-661-7383 or text PLAN to 600-700. Transcript Automatically transcribed from this episode; timestamps are approximate. 00:00 And welcome back into the Financial Safari. Of course, folks, your weekly show looking inside the complex financial world. What I like to do every single week is try to get a national expert, somebody who I've run into in the course of day-to-day affairs or seen an article or book by. And I ran into an excellent article called The Annuity Imperative. It was written by a fellow named Bob Seawright. Bob's a lawyer and attorney, and he is in San Diego, California. He works for Madison Avenue Securities. He's the chief investment officer. And Bob, welcome in. Coach Pete, it's a pleasure to be with you. Thank you. Bob, it's a pleasure. On this end of the table, I see you went to Duke University and graduated from law school about 30 years ago. That's correct. And I hope you as a Carolina alum won't hold that too harshly against me. Folks from all across the nation, Bob, our show goes all across the nation. And I know everyone listening knows the intense rivalry between Duke and Carolina. 00:48 Each and every day. That's right. And my wife went to Wake Forest, so she appreciates it too. Okay. Well, there was a time where Wake Forest had sprung up there and was giving us a little run for our money, but now it's back to Duke and Carolina again. There you go. So the question is, and I know you see this every day in your way of work, and I know I see it as a planner and a radio show host, and we see questions come in. People are worried right now, Bob, and they don't really know what to do with their money to make sure they get that lifetime income. So we turn annuities a lot of times when we do our foundational planning. But let me ask you, what are some of the common misconceptions about annuities these days? And how can people make sure that they're getting with the right planner to educate them? Retirement has a number of risks, and in volatile times like these, they're particularly apparent. There are at least, I think, three of those risks that can only be solved by an income 01:36 annuity. There are a variety of studies that say, in principle at least, people fear outliving their money more than they fear dying. Insurance professionals and actuaries call that longevity risk. And an annuity, which is simply a guaranteed stream of income provided and guaranteed for as long as you live, is the only financial tool out there that provides that guaranteed income that you can't outlive. That it does so 25% to 40% cheaper than you can do on your own because of risk pooling is an added bonus. Another retirement risk is market risk. Having your assets depleted by market volatility, and we've seen a whole lot of that in the last few weeks. An annuity deals with 02:24 that risk by, again, providing that guaranteed income stream that's not going to go down no matter how the market performs. And the third big risk that an annuity can deal with, at least, is inflation risk. Some annuities, though these cost more, provide their guaranteed income streams and adjust them annually for inflation. Those three risks, three of the bigger risks that retirees face, can only be solved in a guaranteed way by an annuity. And annuities can be used as a foundation, again, in that income planning aspect of people's lives, Bob. And tell the listeners what the true value of an income plan is. Having an income plan in place when you reach retirement, it takes a lot of worry away, doesn't it? It sure does. It's an individual thing because people react differently. But when I talk 03:12 with retirees, there are a couple of things that stand out. Since running out of money is such a common fear, true income planning that provides a foundation of guaranteed income to supplement Social Security and a pension, if you're fortunate enough to have one, provides peace of mind, what I call sleep insurance. It allows people to sleep at night knowing that their basic needs are going to be covered no matter what happens in the market and with the rest of their assets. It also provides them, I think, with a fair amount more freedom and flexibility with the rest of their assets, the rest of their money they have, because, again, they know that those foundational needs are taken care of. And in your report, the annuity imperative, I saw that you also cited a study at Boston College, 03:59 and I've read that same study of the National Retirement Risk Index there. People are worried to the fact that about 51% of people probably don't have enough saved up for retirement right now. That's right. And in fact, the most recent annual revision of that study just came out within the last few weeks, and that number is even higher today. Well, is that because people maybe took too much risk with their money they should never have taken risk with? I think that's true. What behavioral finance teaches us about our tendencies, we tend to make the worst possible decision at the worst possible time because we let our emotions get the best of us. And so we sell when we should buy and we buy when we should sell. And that makes a difficult retirement planning project even more 04:45 difficult. So speaking of being your own worst enemy, a lot of times the media influences that, and they seem to be totally against people putting their money in annuities, yet the alternatives that the media recommends many times underperform what someone could have done in an annuity, correct? I think that's right. And part of that is the fault of the financial industry. Some people are overly aggressive in what they sell or make inappropriate sales or whatever. But I think that's only a part of it. Fortunately, I think the media perception is starting to change. Market volatility has opened a fair number of eyes to the advantages of guaranteed income that can't be outlived. I've seen more positive articles within the past year than I'm used to seeing. And that's a 05:34 really good thing. I don't think the media in general is nearly positive enough, but it's getting a little better. But it's been my opinion for years now that they've been unfair towards their approach on annuities, maybe featuring one of the bad. There are bad annuities out there, the 1,600 annuities. So the media will hype on one annuity and start writing about it when there's 14 other annuities that are doing a real good job. So people need to be very careful. Matter of fact, there was also an article I read where some guy was trying to form his own annuity-like program for income. He would say, well, you don't need an annuity if you balance mutual funds, bonds, and money markets. You could get similar type returns of an annuity with income. But one thing he was forgetting is he couldn't guarantee that income would be there for life. And even more than that, you're right, and I agree with you, he couldn't guarantee it. What's more, 06:22 it would take 25% to 40% more money to get roughly the same result because of risk pooling. If I try to create a portfolio to guarantee income for myself, I have to create an income stream that will last for as long as I might possibly live. For a 65-year-old today, the actuarial tables tell us there's a 23% chance that one member of a 65-year-old couple is going to live to 95. There's a chance that one or both of them could live longer. So if you're creating one of those portfolios for yourself, you have to make sure it will survive and provide guaranteed income for as long as you might possibly live. An insurance company, on the other hand, in creating an annuity for you because it has lots 07:13 of annuitants, only has to create a portfolio and an income stream that will last your expected lifetime, which is roughly 83 for most people today. So that's going to save the individual investor, as I say, 25% to 40%, which then allows them to deal a little differently with the rest of their portfolio. So getting educated is the most important thing, isn't it, Bob? Absolutely. And when you're getting educated, it's good to get educated from a book that's not missing pages. That is not a bad idea at all, Coach Pete. And folks, that was Bob Seawright. And Bob, we very much appreciate you. Again, Bob is a chief investment officer with Madison Avenue Securities. He's in San Diego. Bob, I very much appreciate your time here on the Financial Safari. 08:00 Thank you, Coach Pete. It was a pleasure to be with you. And folks, we'll be right back after this. Thank you.