BHC Marketing > Producer Insights

BHC's Producer Insights
"Financial Literacy and Retirement"

For Immediate Release
Houston, Texas

The economic crisis of the past few years has punctuated the importance of financial literacy, i.e., knowing what options are available, the risks and rewards of each and how to adjust financial positioning in response to life changing events like retirement. Many retirees now know, sadly too late, that financial literacy allows them to take control of key aspects of retirement planning rather than leaving them to chance. They’ve been plummeted by market meltdowns, abysmally low interest rates and uncertain economic times. While they still do not possess the needed financial literacy to manage their money, they’re afraid to follow the advice of professionals because they fear commissions spawn biased advice. The following is food for thought.

If you’ve never asked a prospect their greatest fear about retirement, do so at the first opportunity. Chances are you’ll hear “outliving our money” or concerns about bad investments, falling markets, major illnesses, etc. that lead to financial ruin. Ask “will part of your retirement income come from investments”? Follow with “where do you now keep that money”? If in the market, bank CDs, 401(k), etc., ask “do you know how much income you’ll have when needed or the value of your investments should an emergency arise”? In asking your questions do not be judgmental or offer solutions – regardless of how tempted you may become. You only learn by asking questions and listening. What retirement strategies will you hear?

In the current low rate environment many retirees are turning toward blue chip stocks that pay high dividends, e.g., AT&T (6%), Merck (4.7%), GE (4.05%), etc. These high dividends blind many retirees to the risk of loss: they’ve forgotten that even blue chips can lose value. Additionally, dividends can be and are cut or suspended in bad economic times. Ask questions that point out these realities, e.g., “do you think dividends will hold up in an economic recession” or “what if your stocks lost value”? The objective is to prompt them to think about the risk they are taking without you pointing it out or being judgmental.

In many cases you’ll discover that money is kept in fixed-income places like bonds and bond mutual funds. Ask “what happens to bond values if interest rates rise”? A follow up question is “do you think interest rates will rise or fall in the next few years”? Many brokerage firms recommend fixed-income investments from which four percent can be withdrawn annually for retirement income. If rates rise, bond values drop and more must be sold to maintain income. This percentage withdrawal strategy generally involves Monte Carlo simulations to assess the probability of running out of money but never is the probability guaranteed. You might ask “are you familiar with ‘black swan’ events”? They’re not supposed to happen but history is replete with this ominous bird.

Inflation and taxes will have a bearing on retirement and deserve consideration. Most of the traditional places offering inflation protection potential are risky, e.g., real estate, stocks, mutual funds, etc. Annuities linked to market indexes provide inflation protection potential without the risk of loss. Deferring taxes on earnings until the money is needed in retirement is a key benefit of annuities. Qualified money can be converted to Roth IRA, placed in an annuity and then converted to a tax free lifetime income. Safety, predictability, avoiding losses, favorable tax treatment, inflation protection and liquidity are important to retirees: fixed annuities offer them all.

In closing you might simply inquire “if you could buy a lifetime income at a price you could afford and it was safe, dependable and guaranteed, would you have more peace of mind in retirement”? If the answer is yes or maybe, the door to annuities has been opened. You provide what retirees need most: financial literacy.

Shelby J. Smith, Ph.D.
January 2012

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