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Paul Volcker’s proposal that proprietary trading should be spun off from deposit-taking banks is a worthwhile step in the direction of stabilizing the financial services business.

However, when you consider that business in detail, it becomes clear that further breakups are necessary in order to remove the excessive risks from the U.S. economic system.

There are three problems with the current setup on Wall Street: systemic risk, rent seeking and conflicts of interest. The Volcker proposal addresses the systemic risk problem to a great extent, but does not do much about the other two. For a complete solution, we thus need to go further.

Systemic risk

When Treasury Secretary Larry Summers and former Senator Phil Gramm (R-Texas), among others, pushed through repeal of the Glass-Steagall Act in 1999, they didn’t give proper thought to the dangers of institutions funding a traders’ casino with guaranteed deposits.

The introduction of Glass-Steagall in 1934 had been highly damaging to the economy, because it decapitalized the investment banks, killing off the capital markets for the remainder of the 1930s and playing a major role in prolonging the Great Depression.

Advertisement However, by 1999, the investment banks were more than adequately capitalized (provided they followed sound principles of risk management and leverage, which of course they increasingly didn’t). Thus, the rationale for allowing commercial banking and investment banking to be combined was shaky at best.

It should have caused further doubt that the trigger for Glass-Steagall repeal was the acquisition of the investment bank Salomon Brothers by Citigroup, itself a quagmire of conflicts of interest that had been bailed out from bankruptcy only eight years before.

However, restoring Glass-Steagall as it was would achieve nothing. After all, the two most serious failures of risk management in the 2008 crash were collateralized debt obligations, involving a mortgage bond market in which commercial banks’ securitization operations have always been active, and credit default swaps, a product in which commercial banks were intimately involved from the first.

Conventional underwriting of corporate debt and equity securities, the activity prohibited to commercial banks by Glass-Steagall, was not the problem, as it might have been had the crash occurred with the bursting of the 1999 dot-com bubble. The principal risks involved in finance today are those incurred by traders, but those proliferate in both types of banking.

It’s not clear how Volcker’s ban on proprietary trading in banks benefiting from deposit insurance would work. Every bank foreign exchange desk and money desk trades on the bank’s own account in almost every transaction it makes (relatively few transactions are pure brokerage between two counterparties.)

Thus, however simple the bank’s operations, it cannot avoid “proprietary trading.” Of course you can ban separate “prop trading” desks, but in a naughty world that would drive the proprietary traders to integrate themselves into the operations of the various products concerned, thus negating the effect of the legislation.

The other problem with the Volcker proposal is that even without separate proprietary trading operations, the banks are undertaking risks which they don’t manage properly. Wall Street risk management systems are based on assumptions of Gaussian randomness in markets that are demonstrably far from realistic.

In particular, Wall Street risk management systems understate the risk of several highly risky products such as collateralized debt obligations and credit default swaps. This understatement is in the interest of bank management, which benefits from state bailouts when it all goes wrong. It is even more in the interest of traders, who by and large make the most money from trading the riskiest instruments, and hence welcome artificially large position limits for those instruments.

Since current Wall Street risk management methods are in the interest of those who work on Wall Street, they will not be changed except by regulatory means. Before their alteration they will, even without proprietary trading, leave the Wall Street behemoths in continual danger of explosion.

Rent-seeking

Rent-seeking is another current problem of Wall Street, not addressed by Volcker. This takes many forms, and has resulted from computerization and from the endless proliferation of derivative instruments.

Basically, Wall Street houses, by their substantial market share in trading businesses, acquire insider information about money flows, and then profit by trading on this information. Traders have always done this, of course, and there is no sensible way of making it illegal.

In addition, genuine “crony capitalism” insider information about future finances and future government actions is as available as it always has been, but with larger trading volumes and fewer inhibitions is more usable without technically contravening insider treading legislation.

Thus insider trading, almost all of it technically legal, has acquired an enormously magnified profit potential. This is the principal reason for Wall Street’s greater share of the economy; the genuine value added to third parties from “hedging” or “liquidity” is only a tiny fraction of the rents Wall Street can extract from these markets.

There is no complete solution to this problem, but the best palliative is a “Tobin tax,” a modest ad valorem transaction tax on each trade. By this means, the profitability of “high speed trading” would be eliminated and many of the other insider trading strategies would be reduced in scope and profitability, particularly if the tax were levied on the nominal principal amount of a derivative and not on its theoretical value.

This would in turn swing the power base within Wall Street away from traders and back towards bankers and corporate financiers, whose approach to life is more conducive to maximizing those houses’ genuine economic value added.

Conflicts of interest

The final problem in the Wall Street behemoths, that of conflicts of interest, requires no legislative solution, at least as far as the corporate customers are concerned, but only that the financing business remain adequately competitive.

With behemoths doing corporate financing transactions, any of their customers is faced with huge conflicts in dealing with them. Wall Street pretends to operate internal “Chinese walls” through which sensitive information does not penetrate, but to rely on those is to put yourself entirely under the protection of Wall Street’s ethical integrity, a security currently trading at a very substantial discount.

The solution to these conflicts of interest is “single capacity,” the system under which the City of London acted until the passage of the Financial Services Act of 1986, surely among the most misguided legislation in human history.

Under this system brokers, who sold securities, were kept separate from jobbers, who made markets in them. Both were separate from merchant bankers who arranged financings and carried out mergers and acquisition transactions. When an underwriting took place, the merchant bank arranged the transaction and the brokers sold the underwriting to insurance companies and other large investment institutions, who earned additional income by backstopping deals in this way.

“Proprietary trading” was undertaken by investment trusts, pools of money whose business was to maximize income for their investors, in a similar way to a U.S. hedge fund. As for banking, that was done by the merchant banks if complicated, but the high volume simple transactions were carried out by the clearing banks, home of the nation’s retail deposits but not known for their intellectual heavy lifting.

It worked beautifully, just as well as the modern system, indeed better. It cost far less, in terms of the wealth it extracted from the economy. It was much less risky. And there were few conflicts of interest; each participant in the business, having only one function and capability, was devoted to its own interest rather than torn between the interests of several participants in every transaction.

This system is to some extent returning anyway, with the increasing market share of “boutique” investment banks such as Greenhill & Co. and Evercore Partners, which at least have fewer conflicts of interest than the behemoths. However, a regulatory “nudge” or two would be no bad thing.

As I said, Volcker had a good idea, but he did not go nearly far enough.

© The Prudent Bear. A longer version of this article appeared at atimes.com.

Sherry Lynn Pratt, a quadriplegic 38-year-old African-American woman, was a bed-ridden patient in a Chicago nursing home when, in December 2007, her forsaken life became the only thing standing between a group of “investors” and some $9.1 million in annuity death benefits.

Pratt died destitute in February 2008 of complications from neglected decubitus ulcers, or bedsores. But not before she served as the unwitting pawn in what her family’s lawyers describe as a multi-state conspiracy that also targeted at least six of the nation’s largest insurers.

Like the widely-reported lawsuits filed against attorney Joseph Caramadre and others in Providence, RI, by Western Reserve Life and Transamerica Life, the lawsuits that are filed or about to be filed in Illinois on behalf of Sherry Pratt’s family also involve “stranger-originated annuity transactions,” or STATs.

Advertisement Interviews with or documents provided by the Pratt family’s attorneys, Robert Auler of Urbana, Ill., and Peter C. King of Columbus, Ind., claim that, through offers of what amounted to small finder’s fees, representatives of a Daniel Zeidman of Long Island, NY, and the Esther Zeidman estate, procured Sherry Pratt’s signature on several annuity contracts during the winter of 2007-2008.

Pratt was the named the contracts’ annuitant, on whose life expectancy future annuity payments would be calculated and on whose death, if prior to annuitization, a death benefit would be paid to a designated beneficiary.

Others acting for Zeidman were said to be Menachem (Mark) Berger of Patient Financial Services, Abraham Gottesman and Akiva Greenfield. They allegedly approached a Chicago woman named Debra Flowers in October 2007 and enlisted her help, for compensation, in finding terminally ill nursing home patients.

Through a relative of Ms. Pratt, Ms. Flowers obtained Ms. Pratt’s signature, Social Security number, and other personal information, and sent it to people and companies identified as Richard Horowitz and Mark Firestone of Management Brokers Insurance Company, Beverly Hills, Calif., as well as to Global Risk Management LLC, CZ Planning Group, U.S. Planning Group, AM Consulting Inc., Marc Cohen, Abraham Gottesman, Asher Greenfield and Akiva Greenfield.

In due course, Daniel Zeidman and the Esther Zeidman estate of Boca Raton, Fl., purchased a number of variable annuity contracts using what was purported to be Sherry Pratt’s signature.

According to attorneys Auler and King, Zeidman invested $975,000 in a MetLife annuity, $950,000 in a New York Life annuity, $2.95 million in an ING USA annuity, $1.9 million in a Sun Life annuity, $1.875 million in a Genworth Life annuity, and $494,000 in an annuity issued by The Hartford.

[Given deadline pressures, RIJ was unable to seek or obtain confirmation from those six companies or from the other parties named here but instead relied on documentation from attorneys Auler and King. As a rule, companies do not comment on pending litigation. Attempts by telephone and e-mail to contact Daniel Zeidman and his attorney were unsuccessful.]

In late 2009, relatives of Sherry Pratt became aware of the contracts and contacted the insurance companies involved. In January 2009, MetLife filed a lawsuit in U.S. District Court, Eastern District of New York, indicating that it rescinded Zeidman’s contract and asking the court to decide whether it should return the $975,000 premium to Sherry Pratt’s family or to Daniel Zeidman.

On behalf of the Pratt survivors, Auler has sued the Southshore Nursing and Rehabilitation Center of Chicago for neglect in the death of Ms. Pratt. He told RIJ that he believes that she “was allowed to die” prematurely of horrific and untreated bedsores for reasons not unconnected with the annuity contracts purchased in her name.

According to Auler, Pratt told a relative, “These people are trying to kill me,” in reference to the failure by nursing home staff to treat her skin ulcers.

Under a little-used Illinois statute protecting individuals from the improper exploitation of their identify, Auler and King say they intend to ask the courts to turn the $9.1 million in annuity premiums over to Sherry Pratt’s survivors, as recompense for the  misuse of her identity, and not to return it to Daniel Zeidman.

“Because Sherry Lynn Pratt or her estate is the only innocent or blameless party who has had no benefit whatsoever, and in equity, instead of refunding the money to any of the other parties, equity should direct it to the estate of Sherry Lynn Pratt,” wrote attorney Auler, “not only because she deserved it for the use of her last remaining thing of value, her name and persona, but to discourage this type of transaction in the future, in that perpetrators would stand to lose the funds they cynically ‘invested’ in harvesting the rapidly vanishing lives of dying and innocent patients.”

In late February 2009, the Zeidman Trust’s attorney, Gary Guzzi of the Florida law firm of Akkerman Senterfitt, filed a response to MetLife’s suit, asking that the $975,000 be returned to the Zeidmans.

© 2010 RIJ Publishing. All rights reserved.

While Western Reserve Life describes his client’s “stranger-originated annuity transactions” as fraud, attorney Robert Flanders, a Harvard Law graduate and former Rhode Island Supreme Court Justice, says that Joseph Caramadre merely took fair advantage of a tempting loophole in certain variable annuity contracts.

“There’s nothing new here,” Flanders told RIJ. “He’s been doing these kinds of investments for 15 years. In some cases he invested on his own account. Or he invested for others.” (See this week’s cover story, “In League with the Angel of Death.”)

In fact, he described his client’s actions as a form of rough justice, noting that companies like Western Reserve, a unit of Aegon NV, knowingly offer non-underwritten, generously-enhanced death benefits to maximize annuity sales to the rich and elderly.

And STATs don’t hurt the terminally ill people who serve as annuitants, he said. They or their families receive cash they could not otherwise have obtained. Caramadre placed local ads in Providence offering money to the terminally ill. More than 110 people answered the ads and received $2,000 each, Flanders said. Of those, 44 eventually signed annuity contracts.

Although the annuity purchases that Caramadre arranged overlapped in time with the financial crisis, and despite the fact that STATs can provide a form of investment insurance by guaranteeing premiums, the crisis had nothing to do with Caramadre’s activities, Flanders told RIJ. “It just so happens that there was a financial crisis. That created a situation where the insurance companies had to pony up. Once they had to make good on the guarantees, they were incentivized into claiming there was fraud.”

Advertisement “The thing to understand is that some insurance companies make a conscious decision not to include the kinds of restrictions that would prevent [STATs] to capture market share. Some insurers do require minimum holding periods, or insurable interests or relationships between the annuitant and beneficiary. But there are certain types of products issued by certain insurers where there are no such restrictions,” Flanders added.

Caramadre’s “service was to read through the fine print, to find the right products and steer his clients to the ones that permitted this,” he maintained.

“This is a business decision made by insurers to capture market share. If you put in restrictions such as requiring health tests, you shrink the market. It’s a conscious decision to capture premium. These products are marketed mostly to elderly retired people with short life expectancies. So there’s obviously some risk-taking going on by the issuers. So how can they cry crocodile tears?”

A few members of the public—at least in Providence, R.I., a 375-year-old city as famous for its history of organized crime activity as for prestigious Brown University and the Rhode Island School of Design—appear to agree with Flanders’ portrayal of Caramadre as a modern Robin Hood.

“This man aided the terminally ill people and their families, and took nothing from them,” someone wrote on WJAR-TV’s website after the Providence NBC affiliate broke the Caramadre story last fall. “Far from taking advantage of them, he helped them get money they otherwise had no access to.

“As for the insurance companies, he outsmarted them and took advantage of a loophole (assuming there was no forgery). As a financial planner, I am all too keenly aware of the sales process and features of annuity products which allow insurance companies to legally prey on less informed consumers. Kudos to someone who figured out how to beat them at their own game legally.”

Neither of these sources directed their comments to the issue of whether the licensed representatives who earned commissions on the sale of contracts were aware that the annuitants who were recruited by Caramadre and his associates at Estate Planning Services were terminally ill and that the contracts would exist for only a matter of days, weeks or months at the most.

As for annuity executives who are just now hearing about some of the details of the schemes, they seemed shocked both personally and professionally. “This is so wrong on so many levels, it’s hard to know where to begin,” one insurance executive told RIJ. “It’s harmful to the reputation of financial services. It’s preying on people at the worst possible time.”

He was stunned by the apparent failures of due diligence by the agents or representatives, the supervising broker-dealers, and the insurance companies. But he was most concerned about potential damage to the variable annuity business.

“This is almost like in blackjack, where the card counters can ruin the game for everyone if the casinos don’t throw them out. If professional arbitrageurs can play and prey on the elderly, it could mean the end of these products,” he said.

In a worst case scenario, he said, swindlers might conspire to finance the purchase of variable annuity living benefits by people in their mid-50s, for instance, and then arrange for the commencement of guaranteed lifetime withdrawals immediately after purchase. This type of pre-mediated adverse selection could wreck the financial engineering behind these products and make them impractical for insurers to offer without applying bulky restrictions or raising prices. 

© 2010 RIJ Publishing. All rights reserved.

The well-known indexed annuity expert, Jack Marrion, president of St. Louis-based Advantage Compendium Ltd., predicts that by 2020 the securities industry will exercise control over the annuity market in the U.S.

In a new report, “Fixed Annuity Distribution In 2020,” he forecasts that Boomer demand for lifetime income guarantees will strengthen, and that the securities industry will attach these benefits to investment vehicles with minimal insurer involvement.

“The securities world will be doing a lot more annuity business,” Marrion told RIJ. “The changes are going to be as big as we saw in the ‘80s.” Such predictions aren’t likely to make him popular, he said, but he believes they’re accurate.

Advertisement The report says Rule 151A (the contested SEC rule written in 2008 that reclassifies indexed annuities as securities), if enacted, will ruin the profitability of any insurance marketing organizations (MOs) that doesn’t own or is affiliated with a securities broker-dealer or advisory firm and therefore won’t be able to collect commissions from the sale of securities.

Three out of four insurance wholesalers don’t have such affiliations, Marrion said. Of the 51 MOs in his study, only six had or were forming their own securities operations. A handful of others, also listed in the study, already have links to securities firms.

The report says in part:

“The next decade for annuity distribution will be unlike any other,” the report says. “Commissions will be lower, regulatory supervision will be ramped up to levels that today’s typical annuity producer cannot imagine, marketing organizations will need to change or die, and the financial markets will continue to be volatile and difficult to forecast.

“And yet more fixed annuities will be purchased in the next ten years than ever before because the fixed annuity value proposition will find a receptive ear in the 57.7 million people that are currently between ages 55 and 75. Fixed annuities, through creative uses of living benefits, will finally be embraced by the financial community and be used to offer protection against the major uncertainties of retirement.

“Wall Street could become the main annuity store for consumers because they have the marketing power, the capital, and they can meet a financial behavioral need best expressed by realizing that we buy both insurance and lottery tickets. Today the ‘insurance need’ in a Wall Street portfolio is met by bonds, but could also be provided with a synthetic annuity attached to an investment.

“A few of the conclusions reached are that 1035 exchanges will significantly decline, securities regulators will essentially supervise the fixed annuity world, and that the largest distributors of fixed annuities in 2020 will be broker-dealers and advisory firms.”

Ten years from now, Marrion predicts:

• Banks and wirehouses are likely to sell multi-year guaranteed rate annuities (MYGAs) during parts of interest cycles and at all times sell fixed annuities to protect against longevity risk or create an income foundation. Wall Street may create synthetic annuities to perform these functions rather than using off-the-shelf insurance company products.
• 1035 Exchanges will have declined resulting in lower annuity sales in all distribution channels.
• Today’s annuity marketing organizations will be rare in 2020 because securities regulators will supervise the fixed annuity world. MOs that offer B/D or RIA capabilities will benefit because they can offer agents someone that “gets them.”
• MOs without securities connections will find a decreasing pool of annuity agents with which to work and greatly reduced overrides.
• Private annuities will not be required in pension plans, despite the current buzz in DC. The use of annuities in retirement planning will grow because of government interest, however.
• There will be a wide variety of fixed annuity guaranteed benefits that go beyond the current lifetime withdrawal riders and LTC/annuity combos.
• Wirehouses, banks and advisory firms will be the biggest distributors of annuity products, but these annuities will be largely synthetic driven by the investment engine within.
• Fixed annuity sales, whether traditional or synthetic, will have strongly increased and be many times greater than they were in 2010.
• A growing number of jobs will be available in the annuity industry for suitability officers, broker/ dealer liaisons, marketing people with behavioral economics backgrounds, and product development specialists.

Advantage Compendium Ltd. provides research and consulting services to insurance companies and financial firms in a variety of annuity areas ranging from the behavioral economic reasons why consumers buy or don’t buy financial products, to carrier and marketing company future industry impact models, as well as providing executive management strategic planning for annuity carriers and distributors.

© 2010 RIJ Publishing. All rights reserved.

Current financial market conditions pose a number of challenges for financial planners, not least of which is the determination of safe withdrawal rates for retired clients.

To solve this problem, many advisors rely on research by fellow planner Bill Bengen, who demonstrated in the early 1990s that, based on history, a 4% to 4.5% initial withdrawal rate, with yearly inflation adjustments, would have been safe for 30 years.

But because an individual who holds funds in retirement accounts would likely need more than $1.3 million to generate an inflation-adjusted, after-tax income stream of $40,000 to $45,000, his numbers are not good news for clients contemplating retirement.

Since Bengen’s initial work, he and other researchers have reexamined withdrawal strategy issues to see if it’s feasible to frame the problem differently or to manage retirement accounts so that retirees can take higher initial withdrawals without undue risk of ruin.

In this article, I highlight work done by Michael Kitces, who looks at stock market valuation levels as meaningful guides to setting withdrawal strategies. I also discuss the use of guaranteed products, like annuities, and how their attractiveness may vary with such factors as P/E levels, interest rates, and market volatility.

P/E ratios and withdrawal rates
Kitces, director of financial planning for Pinnacle Advisory Group and publisher of The Kitces Report, has produced a study showing how stock market valuation levels at the inception of a planning period impact safe withdrawal rates.

To remove the impact of earnings cycles, he uses a price/earnings ratio with the past 10 years of earnings in the denominator. This measure has been called “P/E 10” and “Cyclically Adjusted P/E or (CAPE).” Graham and Dodd used it in the 1930’s, and Yale economist Robert J. Shiller popularized it in his 2006 book, “Irrational Exuberance.”
Testing based on historical data shows that beginning P/E levels have been predictive of long-term stock returns, as the following chart shows.

This chart shows initial P/E’s and equity returns for each decade since 1930. It demonstrates a clear tendency for high P/E’s to presage below average returns and vice versa. (Although PE’s have been good forecasters of long-term returns, they have not been useful in the short run. In the late 1990s, P/E’s rose into the high 20’s, and 30’s and stock prices kept climbing. We remember how that ended.)

Kitces recognized that long-term returns matter most in retirement planning, and that advisors should consider P/E’s at the beginning of the retirement period when choosing a safe withdrawal rate. The following chart, taken from his study, shows the relationship between P/E’s and safe withdrawal rates. (The P/E Quintiles are based on P/E’s at the beginning of rolling 30-year periods starting in 1881.)

Except for Quintile 5, all of the P/E levels allow higher withdrawal rates than those prescribed by Bengen. The Lowest SWR’s could be used for clients who need to be sure of not running out of money, while the Average SWR’s could be used for clients who have backup resources for use in below-average return scenarios.

Immediate annuities and interest rates
Planners might ask: What investment strategies should I recommend when P/E’s are high and Kitces’ approach dictates low withdrawal rates? How can I raise the withdrawal rate without subjecting the client to undue risk? As of early January PE’s have edged above 20, so we are now in Quintile 5 and these questions apply.

Advertisement Altering the stock/bond mix in favor of bonds might appear to be the best approach under these circumstances, and Kitces examines this strategy in his study. But he concludes that emphasizing bonds would probably do more harm than good. Even at high P/E levels, expected returns for stocks exceed expected bond returns.

Buying annuities or other guaranteed products offers another course of action. Immediate annuities convert investments into lifetime income streams. Based on late-January Vanguard/AIG rates, a 65-year old female could purchase an immediate annuity that pays $426.33 per month with annual increases based on actual inflation for $100,000. That equals a 5.1% initial withdrawal rate, so using an annuity could improve the safe withdrawal rate.

But annuities would not necessarily deliver a huge improvement, because the current environment is not particularly favorable for them. Prices of inflation-adjusted annuities reflect both real interest rates and spreads between Treasury bonds and corporate bonds. Real rates as measured by 10-year Treasury Inflation-Protected Securities (TIPS) are currently only 1.35%, compared to a long-term average of 2%.

Real rates may well rise as the economy recovers, however. The spreads between corporate bonds and Treasuries have narrowed over the past year, and it’s not clear whether they will continue to do so. I expect immediate annuity payout rates to trend higher.

At this time, few companies offer inflation-adjusted life annuities and the pricing may not be as competitive as it is for straight fixed-payout annuities. For example, if we compare the Vanguard/AIG rates for the inflation-adjusted annuity with their current rates for annuities with pre-set annual increases, we find an implicit inflation assumption of 3.3%.
Expected inflation based on the TIPS/Treasury spread is currently around 2.3%. A client could purchase an annuity with preset 2.3% annual increases that would pay $478.52 per month, equivalent to a 5.7% initial withdrawal rate. In this environment, I would not recommend investing large sums in annuities, but a planner might advise clients to begin purchasing a series of small immediate annuities over a number of years.

GLWBs and SALBs
Purchasing an investment product with retirement guarantees, such as a variable annuity with a guaranteed lifetime withdrawal benefit (GLWB) or a so-called Standalone Living Benefit (SALB), is another approach. The relatively new SALB product, now offered by four insurers, is simply an unbundled version of the GLWB attached to a managed investment account.

Both the GLWB and SALB combine longevity insurance with protection against poor investment performance. The investment protection piece is effectively a purchase of long-term put options on the stock market. The best time to purchase these products is when stock market volatility is low and options are cheapest.

Looking back, there were times during 2005 and 2006 when the VIX index, a measure of anticipated volatility, fell to between 11 and 12, or well below its long-term average of about 20. During this period, insurers offered GLWB riders with annual charges of only 30 to 50 basis points, causing Moshe Milevsky of York University and others to question whether those charges were high enough to cover potential losses.

During the financial crisis, the VIX soared to 70. Insurers raised GLWB prices to 80 to 100 basis points, placed stricter limits on investment choices and, in some cases, pulled their GLWB products from the market. The VIX subsided as the market partially recovered, but it still stands at around 25 and insurers have not yet reduced the charges for these guarantees.

Even with reduced rider fees, however, SALB products and variable annuities with GLWBs tend to be expensive. Total annual charges typically run 2% to 3% for products that provide only a 5% income guarantee that does not adjust for inflation. Based on an estimated future inflation of 2.3%, that’s equivalent to an inflation-adjusted withdrawal rate of just 3.75% over 30 years, which is below Bengen’s or Kitces’ lowest recommended safe withdrawal rates.

Clients would therefore not enjoy a better withdrawal rate by moving money into these products at today’s pricing levels. SALBs and GLWBs may eventually play a key role in retirement portfolios, but they will need to be more attractively priced. A no-load SALB based on an underlying portfolio of low-cost index funds could be the answer.

Final thoughts
With its low interest rates, high P/E’s, and keen memories of record volatility, the current environment poses challenges for advisers who hope to recommend withdrawals rates and choose investments or guaranteed products for their older clients. Planners who work with clients contemplating retirement might consider the “Don’t Retire Now” strategy.

© 2010 RIJ Publishing. All rights reserved.