Page 28 - Investment Advisor - December 2023

Top News of 2023

explained. “To me, the most problematic more in retirement, because they don’t Finke said. “It allows you to build up
element here is that you aren’t respond- face that same idiosyncratic longevity your base of inflation-protected income
ing to new information about what has risk,” he noted. for life. In my research, I have found that,
happened to your portfolio and also any This extends into the topic of lifetime for most higher-income individuals who
changes in your expected longevity.” income insurance and what advisors can expect to live longer than the average
Pensions used to be much more com- need to know about it, Finke says: “You American, they can expect to meaning-
mon, Finke notes, and it’s useful to con- can consider effectively buying insur- fully increase their overall retirement
sider what this same $40,000 in spending ance against this risk — against the risk wealth by delaying Social Security.”
would look like were it to be guaranteed of having to cut back below a certain Finke, who says this move is a “no
rather than being subject to market and amount of spending in retirement. It’s brainer,” plans to do so in his own retire-
longevity risk. “Would the person who known as a lifetime income benefit, and ment. “The other thing I plan to do in
is spending out of their private $1 mil- generally it will come along on a fixed my own retirement is buy insurance to
lion portfolio spend the same as the annuity or a variable annuity.” protect myself against outliving my sav-
person with the guaranteed income?” With a variable annuity, generally the ings,” he explained. “For example, you can
Finke asked. “The economists will tell guarantee will be lower, and it is relatively get a tax-favored insurance policy of this
you no — the one who has the guaranteed expensive to provide that lifetime income nature through what is known as a quali-
income for life is going to spend more insurance regardless of the specific vehi- fied longevity annuity contract or QLAC.”
because they aren’t facing the same risk cle, Finke says. “It costs about 1.5% for With a QLAC, clients can take up to
of running out of funds very late in life.” a given insurance company to be able to $200,000 of their tax-deferred savings
Clients spending from their own port- provide this expected benefit, according and buy an annuity that will kick in with
folio, if they experience excess longevity or to the academic research,” he explained. income starting at age 85. “At today’s
a rough run in the markets, could see their “What is the expected benefit? If you interest rates it’s incredibly attractive
accounts dwindling as they enter their run out of money in your investment to buy one of these policies,” Finke said.
90s, and that could force some dramatic account, the insurance company will then He also notes that clients can use
and unfortunate spending cuts at a vul- reach into their general account portfolio deferred income annuities purchased
nerable time. “So, this naturally inspires and continue to make those income pay- during the accumulation phase. “You can
people to spend less to avoid that risk, and ments. So, you could really talk about that get rates of returns that are comparable
that is rational, because you are facing that 1.5% not really as a fee but as a premium to what you earn on corporate bonds
idiosyncratic risk and you can’t know how for coverage,” Finke explained. these days,” Finke said. “And there are tax
long you are going to live,” he said. Finke says there are other important benefits associated here too, so it’s again
“With all else being equal with respect pathways to consider to address these one of those under-utilized and under-
to the wealth projected, you see the ones questions. “As an economist, one of my appreciated strategies if your goal is to
with pension income spend significantly favorites is delaying Social Security,” get income in a tax-efficient manner.”

INDUSTRY DEVELOPMENTS

schwab starts layoffs very talented people personally, and we
take that very seriously.”
Charles Schwab has started jobs, based on the company’s Although the cuts were announced
cutting about 5%-6% of its total reported headcount of in August, it wasn’t until this week that
total workforce, a company 35,900 as of Sept. 30. Schwab informed the affected employ-
spokesperson confirmed in “We have said goodbye to ees. Over the summer, “we shared our
early November. The firm approximately 5-6 percent of intent to take certain steps to remove
declined to provide several our workforce,” the spokes- cost and complexity from our organi-
details about the cuts, including the total person said. “These were hard but nec- zation,” the Schwab spokesperson told Schwab: wolterke - stock.adobe.com
headcount affected, what kinds of posi- essary steps to ensure Schwab remains ThinkAdvisor on Wednesday. “These
tions were being eliminated and in what highly competitive, with industry-lead- steps include some changes to our real
divisions of the company. But a 5%-6% ing levels of efficiency, well into the estate footprint, streamlining our oper-
reduction translates into about 2,000 future. They are decisions that impact ating model, and staffing reductions,

26 Investment AdvIsor December 2023 | ThinkAdvisor.com