Probably not a day goes by without the phrase “the client’s best interest” coming to your attention. But it is usually used as a bludgeon against commission-based agents and advisors.
Tom Hegna turns that around to say that a financial advisor who claims to uphold the highest standard of care but ignores annuities is doing a disservice to clients.
The rate of accumulation does not matter if the de-accumulation phase leaves clients out of money or afraid to spend what they have. How is that a safe, secure and happy retirement?
Hegna built a career on crafting happy retirements. After decades with major life insurance companies such as New York Life and MetLife, Hegna turned full time to speaking and writing about how to ensure fulfilling retirements. He has written several books, including Paychecks and Playchecks and Don’t Worry, Retire Happy!
Hegna is a popular speaker, having appeared on the main stage for major association conferences such as the Million Dollar Round Table’s annual meeting. He has also delivered more than 5,000 presentations of his Paychecks and Playchecks concepts.
In this interview with Publisher Paul Feldman, Hegna tells how agents and advisors can confidently help their clients retire happy.
FELDMAN: You have talked about the important concept of sequence of returns in your books. Could you tell us more about that and how it relates to advising clients on annuities?
HEGNA: Clients and advisors don’t understand sequence of returns risk. Here’s an example: A guy retired in 1973. He averaged 10.1 percent a year for the next 22 years. His broker told him to take out 5 percent per year, and, of course, he went dead broke.
People just can’t understand how you can average 10.1 percent a year for 22 years, only take out 5 percent and go broke. It doesn’t make sense to them.
If you lose money early in retirement, it will devastate the whole rest of your retirement because none of that money that you took out gets to grow back. People just don’t understand these basic concepts.
And I would say there are a lot of advisors who do not understand sequence of returns risk.
FELDMAN: Are some advisors missing the point about risk?
HEGNA: Yes, many people think the riskiest time to invest is when you’re in your 80s. “Oh, you gotta be careful in your 80s.”
No, the riskiest time is in your 50s and 60s, because if you lose money right before or right after retirement, it will devastate your whole retirement. If you lose money in your 80s and 90s, it will have much less of an impact on your retirement.
That’s another thing that many of these financial planning types don’t understand. You’ve got to put guaranteed products in these portfolios to retire optimally.
FELDMAN: You’ve written a booklet called Retirement Alpha: How Mortality Credits Improve Retirement Outcomes. What do you mean by retirement alpha, and how would advisors use mortality credits?
HEGNA: Alpha is a measurement of outperformance that the fund manager brings. So if the fund manager does better than the S&P 500, they’re going to say he brings alpha to the portfolio.
When the Financial Research Corporation looked at these annuities, they called these mortality credits a new form of alpha — retirement alpha. That really struck me. So I did some more research, and here’s what I found. Let me give you an example, and then I’ll dig more into the mortality credits.
Think of a 75-year-old couple. It might be your parents. It might be a favorite client. Where is a 75-year-old couple supposed to find any alpha in today’s market?
Are they going to get any alpha from their CDs? No. Are they going to get any alpha from their bonds? No. Are they going to get consistent, reliable alpha from the stock market? No.
What is a 75-year-old couple supposed to do? They’re supposed to come to us to get the new alpha, the retirement alpha. These are the mortality credits of life insurance and annuities.
One of the first questions I would ask this 75-year-old couple is: How much money are you planning to leave to your kids?
You know what 99 percent of them will reply? “Well, I don’t know. I guess whatever’s left over.”
I say no, no, that’s not a good answer. I need a number. I could be $10,000, $100,000, $1 million. I don’t care what the number is, just give me a number of about how much you want to leave your kids.
Once they say that number, I encourage the advisor to run a life insurance illustration, or a second-to-die illustration if it’s a couple, and show them.
Let’s say they want to leave their kids $300,000. Show them they can buy that $300,000 policy for maybe $100,000. So for pennies on the dollar, they’re buying $300,000 to go to their kids. They’re using the leverage, the mortality credits of life insurance, to go to the kids.
Now what does that free them up to do with their money? Spend it. Now they can buy a lifetime income annuity that has a much higher payout rate than bonds or CDs or any other guaranteed type income-producing vehicle, because every check you get from an insurance company and income annuity is composed of three parts.
Part 1 is principal. Anybody can give you principal. Part 2 is interest. Anybody can give you interest.
But Part 3 is the secret sauce that in Paychecks and Playchecks I called mortality credit. And in Don’t Worry, Retire Happy! I call it longevity credits.
Only the life insurance company can guarantee you’ll never run out of money. A banker can’t guarantee you’ll never run out of money. A broker can’t guarantee you’ll never run out of money. But a life insurance company can because they pay these mortality and longevity credits. These credits are a new form of alpha that you can’t get from stocks, you can’t get from bonds.
I know some of your readers are going to be doubters. At seminars, I say, “Look, I know there are some doubters in the audience, so I’m going to give you a chance to prove me wrong and you can be a hero among your peers. If you think what I’m telling you is incorrect, here’s a simple challenge. Build a portfolio that you think I cannot beat.”
Then it’s, “Oh, he’ll never beat this one. This has all good stocks in it.” Yeah, you build that portfolio. You know what I’m going to do? I’m going to reach into that portfolio. I’m going to remove some of the bonds. I’m going to replace them with a lifetime income annuity.
You know what that will do to every single one of your portfolios? It will lower the risk and increase the returns.
I always tell people, if you don’t believe me, prove me wrong. But here’s why they can’t. Inside a portfolio, a lifetime annuity functions like a triple A-rated bond with a triple C-rated yield, with zero standard deviation. What will that do in your portfolio? It will lower the risk and increase the returns.
I always tell people I’m not making this stuff up. These are mathematical, scientific and economic facts.
So here is a fact: If you have readers who are building portfolios for retirement and they’re not using income annuities, they are building suboptimal portfolios. That is not my opinion. That is a mathematical, scientific and economic fact.
Many of these people claim to be a fiduciary. How can you be a fiduciary and not follow math and science and build suboptimal portfolios? It doesn’t make sense to me.
FELDMAN: Indexed universal life has grown to one-fourth of all individual life sold today — what do you think about IUL?
HEGNA: I try to stay away from individual products because I know everybody’s got their biases and their flavors.
I will just say this. If you look at all of the permanent policies — universal life, variable life, whole life, indexed universal life — over time, I personally believe whole life has been a great product during up and down markets, through everything. High interest rates, low interest rates, through all market cycles — whole life has proven itself to be a good policy.
I was the variable life guy for MetLife for quite a few years. Back in the ’90s, variable life was the hottest product going because the markets were going up. The dot-com bubble and everything, it was a great product.
Then the market crashed and people were a little less happy with variable life. When universal life started in the ’70s and ’80s, interest rates were 13, 14, 15 percent and universal life was the rage. Then when interest rates got down to 4 percent, universal life didn’t look as attractive.
Now indexed universal life is kind of the hot product in the whole industry, and I’m not saying anything bad about indexed universal life — especially if it continues to perform as it always has. It may very well replace whole life as a long-term policy, but the jury is still out. And we haven’t seen it go through all types of market cycles — high interest rate, low interest rate, market up, market down.
The other thing is, I spent 22 years in military intelligence, and in military intelligence we used something called indicators and warnings. It’s like we don’t know if North Korea’s going to attack, but if all of a sudden 500 tanks come up to the border and they move their missiles within a mile of the border, those are called indicators and warnings.
One of the indicators and warnings I use in this business is asking who is not issuing indexed annuities? Or who is not issuing indexed universal life? You want to know who it is? The triple-A mutuals are not issuing those policies.
Now that doesn’t mean they’re bad, it just gives me pause because the triple-A mutual wants to sell more life insurance than anybody else. So if they could make that product work over the long term, they’d have that product.
MassMutual would have it. New York Life would have it. State Farm would have it. But they don’t. So I would just say that gives me a little pause.
I know it’s the hot product right now. But you asked me for my personal opinion, and that’s the way I see it. I call them the way I see them.
FELDMAN: Mutuals did not like universal life very much at one time, but many are offering it now.
HEGNA: Yes, a lot of the mutuals do have universal life. They have a fixed account, or they have a variable universal life. So those are pretty well prevalent in the mutual world.
New York Life has variable life. It has universal life. State Farm has universal life. So, triple-A mutuals do have universal life, but none of them that I’m aware of have indexed universal life. And they don’t have indexed annuities either, most of them.
I’m not saying that’s good or bad. They’re ultraconservative companies. But I think over a 100-year period of time, they’ve been proven right more than they’ve been proven wrong. So it’s just things that make me — things that make you say, hmm, you know?
FELDMAN: Absolutely. Part of longevity protection is long-term care insurance. And we’ve seen this huge drop in that market, and there are only a few carriers even interested in writing it these days. Should people still buy individual long-term care policies?
HEGNA: The problem is the media makes it sound like they have a sketchy track record. The fact that these companies had to raise their premiums, I’m not happy about that at all. I mean, it makes the industry look terrible.
But what is that telling you? It means it wasn’t a bad deal, it was too good of a deal because these companies were losing their shirts selling long-term care insurance. The people who bought it got a great deal.
I’m not happy that they are raising premiums. I’m not happy about that. The industry should be embarrassed about that.
But I don’t care what the premium is. The problem is long-term care costs are going through the ceiling. I tell people if you think long-term care insurance is expensive, you ought to try not having it. That will wipe you out.
People are going to have to do something. Now, if they’re not going to buy long-term care insurance, then they can buy a life insurance policy with a long-term care bucket. The thing about that is those are guaranteed never to go up. Because you’re not buying an unlimited number of dollars, you’re buying a bucket of money. You’re buying a million dollars or a half million or two million.
That’s a fixed amount of money. You don’t have to raise the premium, because if long-term care costs you $5 million and you bought a $2 million policy, the company is only going to pay $2 million. They’re not on the hook for the other $3 million.
I think more people are going to the life insurance and annuity side than the individual policy. I think that’s sad, but any plan is better than no plan.
FELDMAN: You work with a lot of agents and advisors across the country. What are some effective strategies you see working today?
HEGNA: Just try to simplify it and use simple steps, like the way I talk in my seminars. People say “Boy, this makes a lot of sense to me.”
If they would just talk about simple ways to secure guaranteed lifetime income and to manage key risks, that’s what I would do. I believe seminar selling still works if that’s a technique they want to use. If they want to do one on one, they could do that. Doing the educational type thing where you give classes at a university, that can work too.
They have to get back to the basics. Retirement is risky business and we’ve got to manage risk. It’s not just about who can get the highest return or who’s got the lowest fees or who’s got the best asset allocation model. That doesn’t have anything to do with retirement. I mean, not much.
It’s really about taking key risks off the table and giving people these guaranteed paychecks and playchecks so that they can actually enjoy their retirement. I always tell people, if you know anybody who’s retired on assets, I got some pretty bad news. They will never, ever, ever be able to fully enjoy their retirement. Do you know why?
Because one, they don’t know how long they’re going to live. Two, they don’t know the rate of return they’re going to get. Three, they don’t know how much money they can take out.
So I promise you they will do one of two things. They will either take out too much money, in which case they can quickly run out of money, or more likely, they’ll never take out enough. They'll join the millions of Americans who are living the “just in case, just in case, just in case” retirement.
What will get you out of a “just in case” retirement is a guaranteed lifetime income.
I always say that it’s not just economics. I talk about math and science and economics. It’s also about psychonomics.
Think about it this way. Every two weeks for your whole life, you got something from your company. You know what that was called? That was called a paycheck. And you know what you did with most of your paycheck? You spent it. You paid for your car, your house and your insurance, and you went on trips. You did that for 40 years. When was the last time you raided your 401(k)? When was the last time you went into your brokerage account and took a bunch of money out of your savings?
“Oh no, we can’t do that. We’ve got to save it. We’ve got to grow it. We’ve got to protect it. We can’t touch it. We’ve got to save it. We’ve got to grow it. We’ve got to protect it. We can’t touch it.”
OK, you do that for 40 years. You honestly think on your 65th birthday you’re going to wake up and say, "By golly I’m going to blow my 401(k) today”? You can’t do it. People can’t spend assets. It’s not just economics, it’s psychonomics. And that’s why all the Ph.D.s who study retirement say you should take a portion of your assets and turn them into these guaranteed playchecks and paychecks because you’ll spend those.
And then you’ll be able to enjoy your retirement. You can go out and do all the things that you want instead of sitting around saying, "Just in case, just in case."
FELDMAN: I think that the stress about those assets affects life expectancy.
HEGNA: It’s the peace of mind that I think increases your life expectancy. When people get older, their worlds get very small and little things matter to them. So they’re trying to live another month to get that check. And then guess what? They live that month, and, oh, I got another check coming in. I’d better be hanging around. I’d better live for that.
They’re stress-free and they look forward to this money, and it tends to help them live longer. It’s been documented numerous places, such as the University of Chicago. If Fortune 100 companies want to check their books of business, they’re going to find out their annuity book lives longer than their life book.
Jane Austen knew about it back in 1811 when she wrote the book Sense and Sensibility, so this is nothing new.